EX-10.1

OPERATING AGREEMENT

                             A.A.P.L. FORM 610-1982

                         MODEL FORM OPERATING AGREEMENT






                               OPERATING AGREEMENT

                                      DATED

                                December 1, 2000

OPERATOR                MIL Production, Inc.

CONTRACT AREA Smith-Boswell #1, IRC #19600, 43.7342 Acre Unit and Steinbach Unit
#1, RRC #19848, 40.32 Acre Unit, all in Ruth Mackey Survey, A-47

COUNTY OF Bastrop                      STATE OF Texas


                      COPYRIGHT 1982 - ALL RIGHTS RESERVED
                        AMERICAN ASSOCIATION OF PETROLEUM
                    LANDMEN, 2408 CONTINENTAL LIFE BUILDING,
                    FORT WORTH, TEXAS, 76102, APPROVED FORM.
                         A.A.P.L. NO. 610 - 1982 REVISED



<PAGE>


A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982

GUIDANCE IN THE PREPARATION OF THIS AGREEMENT:

1. Title Page - Fill in blanks as applicable.

2. Preamble, Page 1 - Enter name of Operator.

3. Article II - Exhibits:

     (a) Indicate Exhibits to be attached.
     (b) If it is desired that no reference be made to nondiscrimination, the
reference to Exhibit "F" should be deleted.

4. Article IILB. - Interests of Parties in Costs and Production - Enter royalty
fraction as agreed to by parties.

5. Article IV.A. - Title Examination - Select option as agreed to by the
parties.

6. Article IV.B. - Loss of Title - If "Joint Loss" of Title is desired, the
following changes should be made:

     (a) Delete Articles IV.B.1 and IV.B.2.
     (b) Article IV.B.3 - Delete phrase "other than those set forth in Articles
         IV.B.1 and IV.B.2 above."
     (c) Article VILE. - Change reference at end of the first grammatical
         paragraph from "Article IV.B.2" to "Article IV.B.3." (d) Article X. -
         Add as the concluding sentence - "All claims or suits involving title
         to any interest subject to this agreement shall be treated as a claim
         or a suit against all parties hereto."

7. Article V - Operator - Enter name of Operator.

8. Article VLA - Initial Well:

     (a) Date of commencement of drilling.
     (b) Location of well.
     (c) Obligation depth.

9. Article VLB.2.(b) - Subsequent Operations - Enter penalty percentage as
agreed to by parties.

10. Article VLC. - Taking Production in Kind - If a Gas Balancing Agreement is
not in existence nor attached hereto as Exhibit "E", then use Alternate Page 8.

11. Article VILD.1. - Limitation of Expenditures - Select option as agreed to by
parties.

12. Article VILD.3. - Limitation of Expenditures - Enter limitation of
expenditure of Operator for single project and amount above which Operator may
furnish information AFE.

13. Article IX. - Internal Revenue Code Election - Delete this article in the
event the agreement is a Tax Partnership and Exhibit "G" is attached.

14. Article X. - Claims and Lawsuits - Enter claim limit as agreed to by
 parties.

15. Article XIII. - Term of Agreement:

     (a) Select Option as agreed to by parties.
     (b) If Option No. 2 is selected, enter agreed number of days in two (2)
         blanks.

16. Article XIV.B - Governing Law - Enter state as agreed to by parties.

17. Signature Page - Enter effective date.

                                        I

<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982

  TABLE OF CONTENTS

Article                            Title                                Page

  I. DEFINITIONS...................................................... 1
  II. EXHIBITS ....................................................... 1
  III. INTERESTS OF PARTIES........................................... 2
     A. OIL AND GAS INTERESTS......................................... 2
     B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION ................. 2
     C. EXCESS ROYALTIES, OVERRIDING ROYALTIES AND OTHER PAYMENTS..... 2
     D. SUBSEQUENTLY CREATED INTERESTS................................ 2
  IV. TITLES.......................................................... 2
     A. TITLE EXAMINATION............................................. 2-3
     B. LOSS OF TITLE................................................. 3
        1. Failure of Title........................................... 3
        2. Loss by Non-Payment or Erroneous Payment of Amount Due..... 3
        3. Other Losses............................................... 3
  V. OPERATOR......................................................... 4
     A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR.................. 4
     B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR. 4
        1. Resignation or Removal of Operator......................... 4
        2. Selection of Successor Operator............................ 4
     C. EMPLOYEES..................................................... 4
     D. DRILLING CONTRACTS............................................ 4
  VI. DRILLING AND DEVELOPMENT........................................ 4
     A. INITIAL WELL.................................................. 4-5
     B. SUBSEQUENT OPERATIONS......................................... 5
        1. Proposed Operations........................................ 5
        2. Operations by Less than All Parties........................ 5-6-7
        3. Stand-By Time.............................................. 7
        4. Sidetracking............................................... 7
     C. TAKING PRODUCTION IN KIND..................................... 7
     D. ACCESS TO CONTRACT AREA AND INFORMATION....................... 8
     E. ABANDONMENT OF WELLS.......................................... 8
        1. Abandonment of Dry Holes................................... 8
        2. Abandonment of Wells that have Produced.................... 8-9
        3. Abandonment of Non-Consent Operations...................... 9
  VII. EXPENDITURES AND LIABILITY OF PARTIES.......................... 9
     A. LIABILITY OF PARTIES.......................................... 9
     B. LIENS AND PAYMENT DEFAULTS.................................... 9
     C. PAYMENTS AND ACCOUNTING....................................... 9
     D. LIMITATION OF EXPENDITURES.................................... 9-10
        1. Drill or Deepen............................................ 9-10
        2. Rework or Plug Back........................................ 10
        3. Other Operations........................................... 10
     E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES.......... 10
     F. TAXES......................................................... 10
     G. INSURANCE..................................................... 11
  VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST ............. 11
     A. SURRENDER OF LEASES........................................... 11
     B. RENEWAL OR EXTENSION OF LEASES................................ 11
     C. ACREAGE OR CASH CONTRIBUTIONS................................. 11
     D. MAINTENANCE OF UNIFORM INTEREST............................... 11
     E. WAIVER OF RIGHTS TO PARTITION................................. 12
     F. PREFERENTIAL RIGHT TO PURCHASE................................ 12
  IX. INTERNAL REVENUE CODE ELECTION.................................. 12
   X. CLAIMS AND LAWSUITS............................................. 13
  XI. FORCE MAJEURE................................................... 13
 XII. NOTICES......................................................... 13
XIII. TERM OF AGREEMENT............................................... 13
 XIV. COMPLIANCE WITH LAWS AND REGULATIONS............................ 14
     A. LAWS, REGULATIONS, AND ORDERS................................. 14
     B. GOVERNING LAW................................................. 14
     C. REGULATORY AGENCIES........................................... 14
  XV. OTHER PROVISIONS................................................ 14
 XVI. MIISCELLANEOUS.................................................. 15

<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982

                               OPERATING AGREEMENT

THIS AGREEMENT, entered into by and between MIL Production, Inc. , 102 Dallas
St. , P.O. Box 49, Argyle, TX 76226 , hereinafter designated and referred to as
"Operator", and the signatory party or parties other than Operator, sometimes
hereinafter referred to individually herein as "Non-Operator", and collectively
as "Non-Operators".

                                   WITNESSETH:

     WHEREAS, the parties to this agreement are owners of oil and gas leases
and/or oil and gas interests in the land identified in Exhibit "A", and the
parties hereto have reached an agreement to explore and develop these leases
and/or oil and gas interests for the production of oil and gas to the extent and
as hereinafter provided,

         NOW, THEREFORE, it is agreed as follows:

                                   ARTICLE I.

                                   DEFINITIONS

     As used in this agreement, the following words and terms shall have the
meanings here ascribed to them:
     A. The term "oil and gas" shall mean oil, gas, casinghead gas, gas
condensate, and all other liquid or gaseous hydrocarbons and other marketable
substances produced therewith, unless an intent to limit the inclusiveness of
this term is specifically stated.
     B. The terms "oil and gas lease", "lease" and "leasehold" shall mean the
oil and gas leases covering tracts of land lying within the Contract Area which
are owned by the parties to this agreement.
     C. The term "oil and gas interests" shall mean unleased fee and mineral
interests in tracts of land lying within the Contract Area which are owned by
parties to this agreement.
     D. The term "Contract Area" shall mean all of the lands, oil and gas
leasehold interests and oil and gas interests intended to be developed and
operated for oil and gas purposes under this agreement. Such lands, oil and gas
leasehold interests and oil and gas interests are described in Exhibit "A".
     E. The term "drilling unit" shall mean the area fixed for the drilling of
one well by order or rule of any state or federal body having authority. If a
drilling unit is not fixed by any such rule or order, a drilling unit shall be
the drilling unit as established by the pattern of drilling in the Contract Area
or as fixed by express agreement of the Drilling Parties.
     F. The term "drillsite" shall mean the oil and gas lease or interest on
which a proposed well is to be located.
     G. The terms "Drilling Party" and "Consenting Party" shall mean a party who
agrees to join in and pay its share of the cost of any operation conducted under
the provisions of this agreement.
     H. The terms "Non-Drilling Party" and "Non-Consenting Party" shall mean a
party who elects not to participate in a proposed operation.

     Unless the context otherwise clearly indicates, words used in the singular
include the plural, the plural includes the singular, and the neuter gender
includes the masculine and the feminine.

                                   ARTICLE II.

                                    EXHIBITS

       The following exhibits, as indicated below and attached hereto, are
incorporated in and made a part hereof:
     A. Exhibit "A", shall include the following information:
        (1) Identification of lands subject to this agreement,
        (2) Restrictions, if any, as to depths, formations, or substances,
     C. Exhibit "C", Accounting Procedure.
     D. Exhibit "D", Insurance.

                                       -1-

<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982

                                  ARTICLE III.
                              INTERESTS OF PARTIES

A. Oil and Gas Interests:

     If any party owns an oil and gas interest in the Contract Area, that
interest shall be treated for all purposes of this agreement and during the term
hereof as if it were covered by the form of oil and gas lease as agreed to by
the parties, and the owner thereof shall be deemed to own both the royalty
interest reserved in such lease and the interest of the lessee thereunder.

B. Interests of Parties in Costs and Production:

     Unless changed by other provisions, all costs and liabilities incurred in
operations under this agreement shall be borne and paid, and all equipment and
materials acquired in operations on the Contract Area shall be owned, by the
parties as their interests are set forth in Exhibit "A". In the same manner, the
parties shall also own all production of oil and gas from the Contract Area
subject to the payment of royalties to the extent of royalty and overriding
royalty interests of record which shall be borne as hereinafter set forth.

     Regardless of which party has contributed the lease(s) and/or oil and gas
interest(s) hereto on which royalty is due and payable, each party entitled to
receive a share of production of oil and gas from the Contract Area shall bear
and shall pay or deliver, or cause to be paid or delivered, to the extent of its
interest in such production, the royalty amount stipulated hereinabove and shall
hold the other parties free from any liability therefor. No party shall ever be
responsible, however, on a price basis higher than the price received by such
party, to any other party's lessor or royalty owner, and if any such other
party's lessor or royalty owner should demand and receive settlement on a higher
price basis, the party contributing the affected lease shall bear the additional
royalty burden attributable to such higher price.

     Nothing contained in this Article III.B. shall be deemed an assignment or
cross-assignment of interests covered hereby.

C. Excess Royalties, Overriding Royalties and Other Payments:

     Unless changed by other provisions, if the interest of any party in any
lease covered hereby is subject to any royalty, overriding royalty, production
payment or other burden on production in excess of the amount stipulated in
Article III.B., such party so burdened shall assume and alone bear all such
excess obligations and shall indemnify and hold the other parties hereto
harmless from any and all claims and demands for payment asserted by owners of
such excess burden.

D. Subsequently Created Interests:

     If any party should hereafter create an overriding royalty, production
payment or other burden payable out of production attributable to its working
interest hereunder, or if such a burden existed prior to this agreement and is
not set forth in Exhibit "A", or was not disclosed in writing to all other
parties prior to the execution of this agreement by all parties, or is not a
jointly acknowledged and accepted obligation of all parties (any such interest
being hereinafter referred to as "subsequently created interest" irrespective of
the timing of its creation and the party out of whose working interest the
subsequently created interest is derived being hereinafter referred to as
"burdened party"), and:

     1. If the burdened party is required under this agreement to assign or
        relinquish to any other party, or parties, all or a portion of its
        working interest and/or the production attributable thereto, said other
        party, or parties, shall receive said assignment and/or production free
        and clear of said subsequently created interest and the burdened party
        shall indemnify and save said other party, or parties, harmless from any
        and all claims and demands for payment asserted by owners of the
        subsequently created interest; and,

     2. If the burdened party fails to pay, when due, its share of expenses
        chargeable hereunder, all provisions of Article VII.B. shall be
        enforceable against the subsequently created interest in the same manner
        as they are enforceable against the working interest of the burdened
        party.

                                   ARTICLE IV.

                                     TITLES

A. Title Examination:

         Title examination shall be made on the drillsite of any proposed well
prior to commencement of drilling operations or, if the Drilling Parties so
request, title examination shall be made on the leases and/or oil and gas
interests included, or planned to be included, in the drilling unit around such
well. The opinion will include the ownership of the working interest, minerals,
royalty, overriding royalty and production payments under the applicable leases.
At the time a well is proposed, each party contributing leases and/or oil and
gas interests to the drillsite, or to be included in such drilling unit, shall
furnish to Operator all abstracts (including federal lease status reports),
title opinions, title papers and curative material in its possession free of
charge. All such information not in the possession of or made available to
Operator by the parties, but necessary for the examination of the title, shall
be obtained by Operator. Operator shall cause title to be examined by attorneys
on its staff or by outside attorneys. Copies of all title opinions shall be
furnished to each party hereto. The cost incurred by Operator in this title
program shall be borne as follows:


     Option No. 1: Costs incurred by Operator in procuring abstracts and title
examination (including preliminary, supplemental, shut-in gas royalty opinions
and division under title opinions) shall be a part of the administrative
overhead as provided in Exhibit "C", and shall not be a direct charge, whether
performed by Operator's staff attorneys or by outside attorneys.

                                       -2-
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982

                                   ARTICLE IV
                                   continued

     Option No. 2: Costs incurred by Operator in procuring abstracts and fees
paid outside attorneys for title examination (including preliminary,
supplemental, shut-in gas royalty opinions and division order title opinions)
shall be borne by the Drilling Parties in the proportion that the interest of
each Drilling Party bears to the total interest of all Drilling Parties as such
interests appear in Exhibit "A". Operator shall make no charge for services
rendered by its staff attorneys or other personnel in the performance of the
above functions.

     Operator shall be responsible for securing curative matter and pooling
amendments or agreements required in connection with leases or oil and gas
interests contributed by such party. Operator shall be responsible for the
preparation and recording of pooling designations or declarations as well as the
conduct of hearings before governmental agencies for the securing of spacing or
pooling orders. This shall not prevent any party from appearing on its own
behalf at any such hearing.

     No well shall be drilled on the Contract Area until after (1) the title to
the drillsite or drilling unit has been examined as above provided, and (2) the
title has been approved by the examining attorney or title has been accepted by
all of the parties who are to participate in the drilling of the well.

B. Loss of Title:

     1. Failure of Title: Should any oil and gas interest or lease, or interest
therein, be lost through failure of title, which loss results in a reduction of
interest from that shown on Exhibit "A", the party contributing the affected
lease or interest shall have ninety (90) days from final determination of title
failure to acquire a new lease or other instrument curing the entirety of the
title failure, which acquisition will not be subject to Article VIILB., and
failing to do so, this agreement, nevertheless, shall continue in force as to
all remaining oil and gas leases and interests: and,
     (a) The party whose oil and gas lease or interest is affected by the title
failure shall bear alone the entire loss and it shall not be entitled to recover
from Operator or the other parties any development or operating costs which it
may have theretofore paid or incurred, but there shall be no additional
liability on its part to the other parties hereto by reason of such title
failure;
     (b) There shall be no retroactive adjustment of expenses incurred or
revenues received from the operation of the interest which has been lost, but
the interests of the parties shall be revised on an acreage basis, as of the
time it is determined finally that title failure has occurred, so that the
interest of the party whose lease or interest is affected by the title failure
will thereafter be reduced in the Contract Area by the amount of the interest
lost;
     (c) If the proportionate interest of the other parties hereto in any
producing well theretofore drilled on the Contract Area is increased by reason
of the title failure, the party whose title has failed shall receive the
proceeds attributable to the increase in such interest (less costs and burdens
attributable thereto) until it has been reimbursed for unrecovered costs paid by
it in connection with such well;
     (d) Should any person not a party to this agreement, who is determined to
be the owner of any interest in the title which has failed, pay in any manner
any part of the cost of operation, development, or equipment, such amount shall
be paid to the party or parties who bore the costs which are so refunded;
     (e) Any liability to account to a third party for prior production of oil
and gas which arises by reason of title failure shall be borne by the party or
parties whose title failed in the same proportions in which they shared in such
prior production; and,
     (f) No charge shall be made to the joint account for legal expenses, fees
or salaries, in connection with the defense of the interest claimed by any party
hereto, it being the intention of the parties hereto that each shall defend
title to its interest and bear all expenses in connection therewith.

     2. Loss by Non-Payment of Erroneous Payment of Amount Due: If, through
mistake or oversight, any rental, shut-in well payment, minimum royalty or
royalty payment, is not paid or is erroneously paid, and as a result a lease or
interest therein terminates, there shall be no monetary liability against the
party who failed to make such payment. Unless the party who failed to make the
required payment secures a new lease covering the same interest within ninety
(90) days from the discovery of the failure to make proper payment, which
acquisition will not be subject to Article VIILB., the interests of the parties
shall be revised on an acreage basis, effective as of the date of termination of
the lease involved, and the party who failed to make proper payment will no
longer be credited with an interest in the Contract Area on account of ownership
of the lease or interest which has terminated. In the event the party who failed
to make the required payment shall not have been fully reimbursed, at the time
of the loss, from the proceeds of the sale of oil and gas attributable to the
lost interest, calculated on an acreage basis, for the development and operating
costs theretofore paid on account of such interest, it shall be reimbursed for
unrecovered actual costs theretofore paid by it (but not for its share of the
cost of any dry hole previously drilled or wells previously abandoned) from so
much of the following as is necessary to effect reimbursement:
     (a) Proceeds of oil and gas, less operating expenses, theretofore accrued
to the credit of the lost interest, on an acreage basis, up to the amount of
unrecovered costs;
     (b) Proceeds, less operating expenses, thereafter accrued attributable to
the lost interest on an acreage basis, of that portion of oil and gas thereafter
produced and marketed (excluding production from any wells thereafter drilled)
which, in the absence of such lease termination, would be attributable to the
lost interest on an acreage basis, up to the amount of unrecovered costs, the
proceeds of said portion of the oil and gas to be contributed by the other
parties in proportion to their respective interests; and,
     (c) Any monies, up to the amount of unrecovered costs, that may be paid by
any party who is, or becomes, the owner of the interest lost, for the privilege
of participating in the Contract Area or becoming a party to this agreement.

     3. Other Losses: All losses incurred, other than those set forth in
Articles IV.B.1. and IV.B.2. above, shall be joint losses and shall be borne by
all parties in proportion to their interests. There shall be no readjustment of
interests in the remaining portion of the Contract Area.

                                      -3-
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982

                                   ARTICLE V.
                                    OPERATOR

A. Designation and Responsibilities of Operator:

     D-MIL Production, Inc. shall be the Operator of the Contract Area, and
shall conduct and direct and have full control of all operations on the Contract
Area as permitted and required by, and within the limits of this agreement. It
shall conduct all such operations in a good and workmanlike manner, but it shall
have no liability as Operator to the other parties for losses sustained or
liabilities incurred, except such as may result from gross negligence or willful
misconduct.

B. Resignation or Removal of Operator and Selection of Successor:

     1. Resignation or Removal of Operator: Operator may resign at any time by
giving written notice thereof to Non-Operators. If Operator terminates its legal
existence, no longer owns an interest hereunder in the Contract Area, or is no
longer capable of serving as Operator, Operator shall be deemed to have resigned
without any action by Non-Operators, except the selection of a successor.
Operator may be removed if it fails or refuses to carry out its duties
hereunder, or becomes insolvent, bankrupt or is placed in receivership, by the
affirmative vote of two (2) or more Non-Operators owning a majority interest
based on ownership as shown on Exhibit "A" remaining after excluding the voting
interest of Operator. Such resignation or removal shall not become effective
until 7:00 o'clock A.M. on the first day of the calendar month following the
expiration of ninety (90) days after the giving of notice of resignation by
Operator or action by the Non-Operators to remove Operator, unless a successor
Operator has been selected and assumes the duties of Operator at an earlier
date. Operator, after effective date of resignation or removal, shall be bound
by the terms hereof as a Non-Operator. A change of a corporate name or structure
of Operator or transfer of Operator's interest to any single subsidiary, parent
or successor corporation shall not be the basis for removal of Operator.

     2. Selection of Successor Operator: Upon the resignation or removal of
Operator, a successor Operator shall be selected by the parties. The successor
Operator shall be selected from the parties owning an interest in the Contract
Area at the time such successor Operator is selected. The successor Operator
shall be selected by the affirmative vote of two (2) or more parties owning a
majority interest based on ownership as shown on Exhibit "A"; provided, however,
if an Operator which has been removed fails to vote or votes only to succeed
itself, the successor Operator shall be selected by the affirmative vote of two
(2) or more parties owning a majority interest based on ownership as shown on
Exhibit "A" remaining after excluding the voting interest of the Operator that
was removed.

C. Employees:

     The number of employees used by Operator in conducting operations
hereunder, their selection, and the hours of labor and the compensation for
services performed shall be determined by Operator, and all such employees shall
be the employees of Operator.

D. Drilling Contracts:

     All wells drilled on the Contract Area shall be drilled on a competitive
contract basis at the usual rates prevailing in the area. If it so desires,
Operator may employ its own tools and equipment in the drilling of wells, but
its charges therefor shall not exceed the prevailing rates in the area and the
rate of such charges shall be agreed upon by the parties in writing before
drilling operations are commenced, and such work shall be performed by Operator
under the same terms and conditions as are customary and usual in the area in
contracts of independent contractors who are doing work of a similar nature.

                                   ARTICLE VI.
                            DRILLING AND DEVELOPMENT

A. Initial Well:

     On or before the    day of      , 19   , Operator shall commence the
drilling of a well for oil and gas at the following location:



 And shall thereafter continue the drilling of the well with due diligence to



 unless granite or other practically impenetrable substance or condition in the
 hole, which renders further drilling impractical, is encountered at a lesser
 depth, or unless all parties agree to complete or abandon the well at a lesser
 depth.

     Operator shall make reasonable tests of all formations encountered during
 drilling which give indication of containing oil and gas in quantities
 sufficient to test, unless this agreement shall be limited in its application
 to a specific formation or formations, in which event Operator shall be
 required to test only the formation or formations to which this agreement may
 apply.

                                      -4-
<PAGE>
 A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982

                                   ARTICLE VI
                                   continued

     If, in Operator's judgment, the well will not produce oil or gas in paying
quantities, and it wishes to plug and abandon the well as a dry hole, the
provisions of Article VI.E.1. shall thereafter apply.

B. Subsequent Operations:

     1. Proposed Operations: Should any party hereto desire to drill any well on
the Contract Area other than the well provided for in Article VI.A., or to
rework, deepen or plug back a dry hole drilled at the joint expense of all
parties or a well jointly owned by all the parties and not then producing in
paying quantities, the party desiring to drill, rework, deepen or plug back such
a well shall give the other parties written notice of the proposed operation,
specifying the work to be performed, the location, proposed depth, objective
formation and the estimated cost of the operation. The parties receiving such a
notice shall have thirty (30) days after receipt of the notice within which to
notify the party wishing to do the work whether they elect to participate in the
cost of the proposed operation. If a drilling rig is on location, notice of a
proposal to rework, plug back or drill deeper may be given by telephone and the
response period shall be limited to forty-eight (48) hours, exclusive of
Saturday, Sunday and legal holidays. Failure of a party receiving such notice to
reply within the period above fixed shall constitute an election by that party
not to participate in the cost of the proposed operation. Any notice or response
given by telephone shall be promptly confirmed in writing.

     If all parties elect to participate in such a proposed operation, Operator
shall, within ninety (90) days after expiration of the notice period of thirty
(30) days (or as promptly as possible after the expiration of the forty-eight
(48) hour period when a drilling rig is on location, as the case may be),
actually commence the proposed operation and complete it with due diligence at
the risk and expense of all parties hereto; provided, however, said commencement
date may be extended upon written notice of same by Operator to the other
parties, for a period of up to thirty (30) additional days if, in the sole
opinion of Operator, such additional time is reasonably necessary to obtain
permits from governmental authorities, surface rights (including rights-of-way)
or appropriate drilling equipment, or to complete title examination or curative
matter required for title approval or acceptance. Notwithstanding the force
majeure provisions of Article XI, if the actual operation has not been commenced
within the time provided (including any extension thereof as specifically
permitted herein) and if any party hereto still desires to conduct said
operation, written notice proposing same must be resubmitted to the other
parties in accordance with the provisions hereof as if no prior proposal had
been made.

     2. Operations by Less than All Parties: If any party receiving such notice
as provided in Article VI.B.1. or VII.D.1. (Option No. 2) elects not to
participate in the proposed operation, then, in order to be entitled to the
benefits of this Article, the party or parties giving the notice and such other
parties as shall elect to participate in the operation shall, within ninety (90)
days after the expiration of the notice period of thirty (30) days (or as
promptly as possible after the expiration of the forty-eight (48) hour period
when a drilling rig is on location, as the case may be) actually commence the
proposed operation and complete it with due diligence. Operator shall perform
all work for the account of the Consenting Parties; provided, however, if no
drilling rig or other equipment is on location, and if Operator is a
Non-Consenting Party, the Consenting Parties shall either: (a) request Operator
to perform the work required by such proposed operation for the account of the
Consenting Parties, or (b) designate one (1) of the Consenting Parties as
Operator to perform such work. Consenting Parties, when conducting operations on
the Contract Area pursuant to this Article VI.B.2., shall comply with all terms
and conditions of this agreement.

     If less than all parties approve any proposed operation, the proposing
party, immediately after the expiration of the applicable notice period, shall
advise the Consenting Parties of the total interest of the parties approving
such operation and its recommendation as to whether the Consenting Parties
should proceed with the operation as proposed. Each Consenting Party, within
forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays) after
receipt of such notice, shall advise the proposing party of its desire to (a)
limit participation to such party's interest as shown on Exhibit "A" or (b)
carry its proportionate part of Non-Consenting Parties' interests, and failure
to advise the proposing party shall be deemed an election under (a). In the
event a drilling rig is on location, the time permitted for such a response
shall not exceed a total of forty-eight (48) hours (inclusive of Saturday,
Sunday and legal holidays). The proposing party, at its election, may withdraw
such proposal if there is insufficient participation and shall promptly notify
all parties of such decision.

     The entire cost and risk of conducting such operations shall be borne by
the Consenting Parties in the proportions they have elected to bear same under
the terms of the preceding paragraph. Consenting Parties shall keep the
leasehold estates involved in such operations free and clear of all liens and
encumbrances of every kind created by or arising from the operations of the
Consenting Parties. If such an operation results in a dry hole, the Consenting
Parties shall plug and abandon the well and restore the surface location at
their sole cost, risk and expense. If any well drilled, rewarded, deepened or
plugged back under the provisions of this Article result in a producer of oil
and/or gas in paying quantities, the Consenting Parties shall complete and equip
the well to produce at their sole cost and risk,

                                       -5-
<PAGE>
 A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982

                                   ARTICLE VI
                                    continued

and the well shall then be turned over to Operator and shall be operated by it
at the expense and for the account of the Consenting Parties. Upon commencement
of operations for the drilling, reworking, deepening or plugging back of any
such well by Consenting Parties in accordance with the provisions of this
Article, each Non-Consenting Party shall be deemed to have relinquished to
Consenting Parties, and the Consenting Parties shall own and be entitled to
receive, in proportion to their respective interests, all of such Non-Consenting
Party's interest in the well and share of production therefrom until the
proceeds of the sale of such share, calculated at the well, or market value
thereof if such share is not sold, (after deducting production taxes, excise
taxes, royalty, overriding royalty and other interests not excepted by Article
III.D. payable out of or measured by the production from such well accruing with
respect to such interest until it reverts) shall equal the total of the
following:

     (a) 100% of each such Non-Consenting Party's share of the cost of any newly
acquired surface equipment beyond the wellhead connections (including, but not
limited to, stock tanks, separators, treaters, pumping equipment and piping),
plus 100% of each such Non-Consenting Party's share of the cost of operation of
the well commencing with first production and continuing until each such
Non-Consenting Party's relinquished interest shall revert to it under other
provisions of this Article, it being agreed that each Non-Consenting Party's
share of such costs and equipment will be that interest which would have been
chargeable to such Non-Consenting Party had it participated in the well from the
beginning of the operations; and

     (b) 300% of that portion of the costs and expenses of drilling, reworking,
deepening, plugging back, testing and completing, after deducting any cash
contributions received under Article VIILC., and 300% of that portion of the
cost of newly acquired equipment in the well (to and including the wellhead
connections), which would have been chargeable to such Non-Consenting Party if
it had participated therein.

     An election not to participate in the drilling or the deepening of a well
shall be deemed an election not to participate in any reworking or plugging back
operation proposed in such a well, or portion thereof, to which the initial
Non-Consent election applied that is conducted at any time prior to full
recovery by the Consenting Parties of the Non-Consenting Party's recoupment
account. Any such reworking or plugging back operation conducted during the
recoupment period shall be deemed part of the cost of operation of said well and
there shall be added to the sums to be recouped by the Consenting Parties one
hundred percent (100%) of that portion of the costs of the reworking or plugging
back operation which would have been chargeable to such Non-Consenting Party had
it participated therein. If such a reworking or plugging back operation is
proposed during such recoupment period, the provisions of this Article VLB.
shall be applicable as between said Consenting Parties in said well.

     During the period of time Consenting Parties are entitled to receive
Non-Consenting Party's share of production, or the proceeds therefrom,
Consenting Parties shall be responsible for the payment of all production,
severance, excise, gathering and other taxes, and all royalty, overriding
royalty and other burdens applicable to Non-Consenting Party's share of
production not excepted by Article IILD.

     In the case of any reworking, plugging back or deeper drilling operation,
the Consenting Parties shall be permitted to use, free of cost, all casing,
tubing and other equipment in the well, but the ownership of all such equipment
shall remain unchanged; and upon abandonment of a well after such reworking,
plugging back or deeper drilling, the Consenting Parties shall account for all
such equipment to the owners thereof, with each party receiving its
proportionate part in kind or in value, less cost of salvage.

      Within sixty ((60) days after the completion of any operation under this
 Article, the party conducting the operations for the Consenting Parties shall
 furnish each Non-Consenting Party with an inventory of the equipment in and
 connected to the well, and an itemized statement of the cost of drilling,
 deepening, plugging back, testing, completing, and equipping the well for
 production; or, at its option, the operating party, in lieu of an itemized
 statement of such costs of operation, may submit a detailed statement of
 monthly billings. Each month thereafter, during the time the Consenting Parties
 are being reimbursed as provided above, the party conducting the operations for
 the Consenting Parties shall furnish the Non-Consenting Parties with an
 itemized statement of all costs and liabilities incurred in the operation of
 the well, together with a statement of the quantity of oil and gas produced
 from it and the amount of proceeds realized from the sale of the well's working
 interest production during the preceding month. In determining the quantity of
 oil and gas produced during any month, Consenting Parties shall use industry
 accepted methods such as., but not limited to, metering or periodic well tests.
 Any amounts realized from the sale or other disposition of equipment newly
 acquired in connection with any such operation which would have been owned by a
 Non-Consenting Party had it participated therein shall be credited against the
 total unreturned costs of the work done and of the equipment purchased in
 determining when the interest of such Non-Consenting Party shall revert to it
 as above provided; and if there is a credit balance, it shall be paid to such
 Non-Consenting Party.

                                       -6-
<PAGE>
 A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982

                                   ARTICLE VI
                                   continued

     If and when the Consenting Parties recover from a Non-Consenting Party's
relinquished interest the amounts provided for above, the relinquished interests
of such Non-Consenting Party shall automatically revert to it, and, from and
after such reversion, such NonConsenting Party shall own the same interest in
such well, the material and equipment in or pertaining thereto, and the
production therefrom as such Non-Consenting Party would have been entitled to
had it participated in the drilling, reworking, deepening or plugging back of
said well. Thereafter, such Non-Consenting Party shall be charged with and shall
pay its proportionate part of the further costs of the operation of said well in
accordance with the terms of this agreement and the Accounting Procedure
attached hereto.

     Notwithstanding the provisions of this Article VI.B.2., it is agreed that
without the mutual consent of all parties, no wells shall be completed in or
produced from a source of supply from which a well located elsewhere on the
Contract Area is producing, unless such well conforms to the then-existing well
spacing pattern for such source of supply.

     The provisions of this Article shall have no application whatsoever to the
drilling of the initial well described in Article VI.A. except (a) as to Article
VII.D.I. (Option No. 2), if selected, or (b) as to the reworking, deepening and
plugging back of such initial well after it has been drilled to the depth
specified in Article VI.A. if it shall thereafter prove to be a dry hole or, if
initially completed for production, ceases to produce in paying quantities.

     3. Stand-By Time: When a well which has been drilled or deepened has
reached its authorized depth and all tests have been completed, and the results
thereof furnished to the parties, standby costs incurred pending response to a
party's notice proposing a reworking, deepening, plugging back or completing
operation in such a well shall be charged and borne as part of the drilling or
deepening operation just completed. Stand-by costs subsequent to all parties
responding, or expiration of the response time permitted, whichever first
occurs, and prior to agreement as to the participating interests of all
Consenting Parties pursuant to the terms of the second grammatical paragraph of
Article VI.B.2, shall be charged to and borne as part of the proposed operation,
but if the proposal is subsequently withdrawn because of insufficient
participation, such stand-by costs shall be allocated between the Consenting
Parties in the proportion each Consenting Party's interest as shown on Exhibit
"A" bears to the total interest as shown on Exhibit "A" of all Consenting
Parties.

     4. Sidetracking: Except as hereinafter provided, those provisions of this
agreement applicable to a "deepening" operation shall also be applicable to any
proposal to directionally control and intentionally deviate a well from vertical
so as to change the bottom hole location (herein called "sidetracking"), unless
done to straighten the hole or to drill around junk in the hole or because of
other mechanical difficulties. Any party having the right to participate in a
proposed sidetracking operation that does not own an interest in the affected
well bore at the time of the notice shall, upon electing to participate, tender
to the well bore owners its proportionate share (equal to its interest in the
sidetracking operation) of the value of that portion of the existing well bore
to be utilized as follows:

     (a) If the proposal is for sidetracking an existing dry hole, reimbursement
shall be on the basis of the actual costs incurred in the initial drilling of
the well down to the depth at which the sidetracking operation is initiated.

     (b) If the proposal is for sidetracking a well which has previously
produced, reimbursement shall be on the basis of the well's salvable materials
and equipment down to the depth at which the sidetracking operation is
initiated, determined in accordance with the provisions of Exhibit "C", less the
estimated cost of salvaging and the estimated cost of plugging and abandoning.

     In the event that notice for a sidetracking operation is given while the
drilling rig to be utilized is on location, the response period shall be limited
to forty-eight (48) hours, exclusive of Saturday, Sunday and legal holidays;
provided, however, any party may request and receive up to eight (8) additional
days after expiration of the forty-eight (48) hours within which to respond by
paying for all stand-by time incurred during such extended response period. If
more than one party elects to take such additional time to respond to the
notice, standby costs shall be allocated between the parties taking additional
time to respond on a day-to-day basis in the proportion each electing party's
interest as shown on Exhibit "A" bears to the total interest as shown on Exhibit
"A" of all the electing parties. In all other instances the response period to a
proposal for sidetracking shall be limited to thirty (30) days.

C.  TAKING PRODUCTION IN KIND:

     Each party shall take in kind or separately dispose of its proportionate
share of all oil and gas produced from the Contract Area, exclusive of
production which may be used in development and producing operations and in
preparing and treating oil and gas for marketing purposes and production
unavoidably lost. Any extra expenditure incurred in the taking in kind or
separate disposition by any party of its proportionate share of the production
shall be borne by such party. Any party taking its share of production in kind
shall be

                                       -7-
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982

                                   ARTICLE VI
                                    continued

required to pay for only its proportionate share of such part of Operator's
surface facilities which it uses.

     Each party shall execute such division orders and contracts as may be
necessary for the sale of its interest in production from the Contract Area,
and, except as provided in Article VILB., shall be entitled to receive payment
directly from the purchaser thereof for its share of all production.

     In the event any party shall fail to make the arrangements necessary to
take in kind or separately dispose of its proportionate share of the oil
produced from the Contract Area, Operator shall have the right, subject to the
revocation at will by the party owning it, but not the obligation, to purchase
such oil or sell it to others at any time and from time to time, for the account
of the non-taking party at the best price obtainable in the area for such
production. Any such purchase or sale by Operator shall be subject always to the
right of the owner of the production to exercise at any time its right to take
in kind, or separately dispose of, its share of all oil not previously delivered
to a purchaser. Any purchase or sale by Operator of any other party's share of
oil shall be only for such reasonable periods of time as are consistent with the
minimum needs of the industry under the particular circumstances, but in no
event for a period in excess of one (1) year.

     In the event one or more parties' separate disposition of its share of the
gas causes split-stream deliveries to separate pipelines and/or deliveries which
on a day-to-day basis for any reason are not exactly equal to a party's
respective proportionate share of total gas sales to be allocated to it, the
balancing or accounting between the respective accounts of the parties shall be
in accordance with any gas balancing agreement between the parties hereto,
whether such an agreement is attached as Exhibit "E", or is a separate
agreement.

D. Access to Contract Area and Information:

     Each party shall have access to the Contract Area at all reasonable times,
at its sole cost and risk to inspect or observe operations, and shall have
access at reasonable times to information pertaining to the development or
operation thereof, including Operator's books and records relating thereto.
Operator, upon request, shall furnish each of the other parties with copies of
all forms or reports filed with governmental agencies, daily drilling reports,
well logs, tank tables, daily gauge and run tickets and reports of stock on hand
at the first of each month, and shall make available samples of any cores or
cuttings taken from any well drilled on the Contract Area. The cost of gathering
and furnishing information to Non-Operator, other than that specified above,
shall be charged to the Non-Operator that requests the information.

E. Abandonment of Wells:

     1. Abandonment of Dry Holes: Except for any well drilled or deepened
pursuant to Article VLB.2., any well which has been drilled or deepened under
the terms of this agreement and is proposed to be completed as a dry hole shall
not be plugged and abandoned without the consent of all parties. Should
Operator, after diligent effort, be unable to contact any party, or should any
party fail to reply within forty-eight (48) hours (exclusive of Saturday, Sunday
and legal holidays) after receipt of notice of the proposal to plug and abandon
such well, such party shall be deemed to have consented to the proposed
abandonment. All such wells shall be plugged and abandoned in accordance with
applicable regulations and at the cost, risk and expense of the parties who
participated in the cost of drilling or deepening such well. Any party who
objects to plugging and abandoning such well shall have the right to take over
the well and conduct further operations in search of oil and/or gas subject to
the provisions of Article VLB.

     2. Abandonment of Wells that have Produced: Except for any well in which a
Non-Consent operation has been conducted hereunder for which the Consenting
Parties have not been fully reimbursed as herein provided, any well which has
been completed as a producer shall not be plugged and abandoned without the
consent of all parties. If all parties consent to such abandonment, the well
shall be plugged and abandoned in accordance with applicable regulations and at
the cost, risk and expense of all the parties hereto. If, within thirty (30)
days after receipt of notice of the proposed abandonment of any well, all
parties do not agree to the abandonment of such well, those wishing to continue
its operation from the intervals) of the formations) then open to production
shall tender to each of the other parties its proportionate share of the value
of the well's salvable material and equipment, determined in accordance with the
provisions of Exhibit "C", less the estimated cost of salvaging and the
estimated cost of plugging and abandoning. Each abandoning party shall assign
the non-abandoning parties, without warranty, express or implied, as to title or
as to quantity, or fitness for use of the equipment and material, all of its
interest in the well and related equipment, together with its interest in the
leasehold estate as to, but only as to, the interval or intervals of the
formation or formations then open to production. If the interest of the
abandoning party is or includes an oil and gas interest, such party shall
execute and deliver to the non-abandoning party or parties an oil and gas lease,
limited to the interval or intervals of the formation or formations then open to
production, for a term of one (1) year and so long thereafter as oil and/or gas
is produced from the interval or intervals of the formation or formations
covered thereby, such lease to be on the form attached as Exhibit

                                       -8-
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982

                                   ARTICLE VI
                                   continued

 "B". The assignments or leases so limited shall encompass the "drilling unit"
 upon which the well is located. The payments by, and the assignments or leases
 to, the assignees shall be in a ratio based upon the relationship of their
 respective percentage of participation in the Contract Area to the aggregate of
 the percentages of participation in the Contract Area of all assignees. There
 shall be no readjustment of interests in the remaining portion of the Contract
 Area.

     Thereafter, abandoning parties shall have no further responsibility,
liability, or interest in the operation of or production from the well in the
interval or intervals then open other than the royalties retained in any lease
made under the terms of this Article. Upon request, Operator shall continue to
operate the assigned well for the account of the non-abandoning parties at the
rates and charges contemplated by this agreement, plus any additional cost and
charges which may arise as the result of the separate ownership of the assigned
well. Upon proposed abandonment of the producing intervals) assigned or leased,
the assignor or lessor shall then have the option to repurchase its prior
interest in the well (using the same valuation formula) and participate in
further operations therein subject to the provisions hereof.

     3. Abandonment of Non-Consent Operations: The provisions of Article VI.E.l.
or VI.E.2. above shall be applicable as between Consenting Parties in the event
of the proposed abandonment of any well excepted from said Articles; provided,
however, no well shall be permanently plugged and abandoned unless and until all
parties having the right to conduct further operations therein have been
notified of the proposed abandonment and afforded the opportunity to elect to
take over the well in accordance with the provisions of this Article VI.E.

                                  ARTICLE VII.

                      EXPENDITURES AND LIABILITY OF PARTIES

A. Liability of Parties:

     The liability of the parties shall be several, not joint or collective.
Each party shall be responsible only for its obligations, and shall be liable
only for its proportionate share of the costs of developing and operating the
Contract Area. Accordingly, the liens granted among the parties in Article
VII.B. are given to secure only the debts of each severally. It is not the
intention of the parties to create, nor shall this agreement be construed as
creating, a mining or other partnership or association, or to render the parties
liable as partners.

B. Liens and Payment Defaults:
     Each Non-Operator grants to Operator a lien upon its oil and gas rights in
the Contract Area, and a security interest in its share of oil and/or gas when
extracted and its interest in all equipment, to secure payment of its share of
expense, together with interest thereon at the rate provided in Exhibit "C". To
the extent that Operator has a security interest under the Uniform Commercial
Code of the state, Operator shall be entitled to exercise the rights and
remedies of a secured party under the Code. The bringing of a suit and the
obtaining of judgment by Operator for the secured indebtedness shall not be
deemed an election of remedies or otherwise affect the lien rights or security
interest as security for the payment thereof. In addition, upon default by any
Non-Operator in the payment of its share of expense, Operator shall have the
right, without prejudice to other rights or remedies, to collect from the
purchaser the proceeds from the sale of such Non Operator's share of oil and/or
gas until the amount owed by such Non-Operator, plus interest, has been paid.
Each purchaser shall be entitled to rely upon Operator's written statement
concerning the amount of any default. Operator grants a tike lien and security
interest to the Non-Operators to secure payment of Operator's proportionate
share of expense.

     If any party fails or is unable to pay its share of expense within sixty
(60) days after rendition of a .statement therefor by Operator, the
non-defaulting parties, including Operator, shall, upon request by Operator, pay
the unpaid amount in the proportion that the interest of each such party bears
to the interest of all such parties. Each party so paying its share of the
unpaid amount shall, to obtain reimbursement thereof, be subrogated to the
security rights described in the foregoing paragraph.

C. Payments and Accounting:

     Except as herein otherwise specifically provided, Operator shall promptly
pay and discharge expenses incurred in the development and operation of the
Contract Area pursuant to this agreement and shall charge each of the parties
hereto with their respective proportionate shares upon the expense basis
provided in Exhibit "C". Operator shall keep an accurate record of the ;pint
account hereunder, showing expenses incurred and charges and credits made and
received.

     Operator, at its election, shall have the right from time to time to demand
and receive from the other parties payment in advance of their respective shares
of the estimated amount of the expense to be incurred in operations hereunder
during the next succeeding month, which right may be exercised only by
submission to each such party of an itemized statement of such estimated
expense, together with an invoice for its share thereof. Each such statement and
invoice for the payment in advance of estimated expense shall be submitted on or
before the 20th day of the next preceding month. Each party shall pay to
Operator its proportionate share of such estimate within fifteen (15) days after
such estimate and invoice is received. If any party fails to pay its share of
said estimate within said time, the amount due shall bear interest as provided
in Exhibit "C" until paid. Proper adjustment shall be made monthly between
advances and actual expense to the end that each party shall bear and pay its
proportionate share of actual expenses incurred, and no more.

D.  Limitation of Expenditures:

     1. Drill and Deepen: Without the consent of the parties, no well shall be
drilled or deepened, except any well drilled or deepened pursuant to the
provisions of Article VI.B. of this agreement. Consent to the drilling or
deepening shall include:

                                       -9-
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982

                                   ARTICLE VII
                                   continued

     Option No. 1: All necessary expenditures for the drilling or deepening,
testing, completing and equipping of the well, including necessary tankage
and/or surface facilities.

     Option No. 2: All necessary expenditures for the drilling or deepening and
testing of the well. When such well has reached its authorized depth, and all
tests have been completed, and the results thereof furnished to the parties,
Operator shall give immediate notice to the Non-0perators who have the right to
participate in the completion costs. The parties receiving such notice shall
have forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays)
in which to elect to participate in the setting of casing and the completion
attempt. Such election, when made, shall include consent to all necessary
expenditures for the completing and equipping of such well, including necessary
tankage and/or surface facilities. Failure of any party receiving such notice to
reply within the period above fixed shall constitute an election by that party
not to participate in the cost of the completion attempt. If one or more, but
less than all of the parties, elect to set pipe and to attempt a completion, the
provisions of Article VLB.2. hereof (the phrase "reworking, deepening or
plugging back" as contained in Article VLB.2. shall be deemed to include
"completing") shall apply to the operations thereafter conducted by less than
all parties.

     2. Rework or Plug Back: Without the consent of all parties, no well shall
be reworked or plugged back except a well reworked or plugged back pursuant to
the provisions of Article VLB.2. of this agreement. Consent to the reworking or
plugging back of a well shall include all necessary expenditures in conducting
such operations and completing and equipping of said well, including necessary
tankage and/or surface facilities.

     3. Other Operations: Without the consent et ail parties, Operator shall not
undertake any single project reasonably estimated to require an expenditure in
excess of Ten Thousand & 00/100 Dollars ($10.000.00) except in connection with a
well, the drilling, reworking, deepening, completing, recompleting, or plugging
back of which has been previously authorized by or pursuant to this agreement;
provided, however, that, in case of explosion, fire, flood or other sudden
emergency, whether of the same or different nature, Operator may take such steps
and incur such expenses as in its opinion are required to deal with the
emergency to safeguard life and property but Operator, as promptly as possible,
shall report the emergency to the other parties. If Operator prepares an
authority for expenditure (AFEI for its own use, Operator shall furnish any
Non-Operator so requesting an information copy thereof for any single project
costing in excess of Ten Thousand & 00/100 Dollars ($10,000.00) but less than
the amount first set forth above in this paragraph.

E. Rentals, Shut-in Well Payments and Minimum Royalties:

     Rentals, shut-in well payments and minimum royalties which may be required
under the terms of any lease shall be paid by the party or parties who subjected
such lease to this agreement at its or their expense. In the event two or more
parties own and have contributed interests in the same lease to this agreement,
such parties may designate one of such parties to make said payments for and on
behalf of all such parties. Any party may request, and shall be entitled to
receive, proper evidence of all such payments. In the event of failure to make
proper payment of any rental, shut-in well payment or minimum royalty through
mistake or oversight where such payment is required to continue the lease in
force, any loss which results from such non-payment shall be borne in accordance
with the provisions of Article IV.B.2.

     Operator shall notify Non-0perator of the anticipated completion of a
shut-in gas well, or the shutting in or return to production of a producing gas
well, at least five (5) days (excluding Saturday, Sunday and legal holidays), or
at the earliest opportunity permitted by circumstances, prior to taking such
action, but assumes no liability for failure to do so. In the event of failure
by Operator to so notify Non-Operator, the loss of any lease contributed hereto
by Non-Operator for failure to make timely payments of any shut-in well payment
shall be borne jointly by the parties hereto under the provisions of Article
IV.B.3.

F. Taxes:

     Beginning with the first calendar year after the effective date hereof,
Operator shall render for ad valorem taxation all property subject to this
agreement which by law should be rendered for such taxes, and it shall pay all
such taxes assessed thereon before they become delinquent. Prior to the
rendition date, each Non-Operator shall furnish Operator information as to
burdens (to include, but not be limited to, royalties, overriding royalties and
production payments) on leases and oil and gas interests contributed by such
NonOperator. If the assessed valuation of any leasehold estate is reduced by
reason of its being subject to outstanding excess royalties, overriding
royalties or production payments, the reduction in ad valorem taxes resulting
therefrom shall inure to the benefit of the owner or owners of such leasehold
estate, and Operator shall adjust the charge to such owner or owners so as to
reflect the benefit of such reduction. If the ad valorem taxes are based in
whole or in part upon separate valuations of each party's working interest, then
notwithstanding anything to the contrary herein, charges to the joint account
shall be made and paid by the parties hereto in accordance with the tax value
generated by each party's working interest. Operator shall bill the other
parties for their proportionate shares of all tax payments in the manner
provided in Exhibit "C".

     If Operator considers any tax assessment improper, Operator may, at its
discretion, protest within the time and manner prescribed by law, and prosecute
the protest to a final determination, unless all parties agree to abandon the
protest prior to final determination. During the pendency of administrative or
judicial proceedings, Operator may elect to pay, under protest, all such taxes
and any interest and penalty. When any such protested assessment shall have been
finally determined, Operator shall pay the tax for the joint account, together
with any interest and penalty accrued, and the total cost shall then be assessed
against the parties, and be paid by them, as provided in Exhibit "C".

     Each party shall pay or cause to be paid all production, severance, excise,
gathering and other taxes imposed upon or with respect to the production or
handling of such party's share of oil and/or gas produced under the terms of
this agreement.
                                      -10-
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982

                                  ARTICLE, VII
                                   continued

G. Insurance:

     At all times while operations are conducted hereunder, Operator shall
comply with the workmen's compensation law of the state where the operations are
being conducted; provided, however, that Operator may be a self-insurer for
liability under said compensation laws in which event the only charge that shall
be made to the joint account shall be as provided in Exhibit "C". Operator shall
also carry or provide insurance for the benefit of the joint account of the
parties as outlined in Exhibit "D", attached to and made a part hereof. Operator
shall require all contractors engaged in work on or for the Contract Area to
comply with the workmen's compensation law of the state where the operations are
being conducted and to maintain such other insurance as Operator may require.

     In the event automobile public liability insurance is specified in said
Exhibit "D", or subsequently receives the approval of the parties, no direct
charge shall be made by Operator for premiums paid for such insurance for
Operator's automotive equipment.

                                  ARTICLE VIII.
                ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST

A. Surrender of Leases:

     The leases covered by this agreement, insofar as they embrace acreage in
the Contract Area, shall not be surrendered in whole or in part unless all
parties consent thereto.

     However, should any party desire to surrender its interest in any lease or
in any portion thereof, and the other parties do not agree or consent thereto,
the party desiring to surrender shall assign, without express or implied
warranty of title, all of its interest in such lease, or portion thereof, and
any well, material and equipment which may be located thereon and any rights in
production thereafter secured, to the parties not consenting to such surrender.
If the interest of the assigning party is or includes an oil and gas interest,
the assigning party shall execute and deliver to the party or parties not
consenting to such surrender an oil and gas lease covering such oil and gas
interest for a term of one (1) year and so long thereafter as oil and/or gas is
produced from the land covered thereby, such lease to be on the form attached
hereto as Exhibit "B". Upon such assignment or lease, the assigning party shall
be relieved from all obligations thereafter accruing, but not theretofore
accrued, with respect to the interest assigned or leased and the operation of
any well attributable thereto, and the assigning party shall have no further
interest in the assigned or leased premises and its equipment and production
other than the royalties retained in any lease made under the terms of this
Article. The party assignee or lessee shall pay to the party assignor or lessor
the reasonable salvage value of the tatter's interest in any wells and equipment
attributable to the assigned or leased acreage. The value of all material shall
be determined in accordance with the provisions of Exhibit "C'", less the
estimated cost of salvaging and the estimated cost of plugging and abandoning.
If the assignment or lease is in favor of more than one party, the interest
shall be shared by such parties in the proportions that the interest of each
bears to the total interest of all such parties.

     Any assignment, lease or surrender made under this provision shall not
reduce or change the assignor's, lessor's or surrendering party's interest as it
was immediately before the assignment, lease or surrender in the balance of the
Contract Area; and the acreage assigned, leased or surrendered; and subsequent
operations thereon, shall not thereafter be subject to the terms and provisions
of this agreement.

B. Renewal or Extension of Leases:

     If any party secures a renewal of any oil and gas lease subject to this
agreement, all other parties shall be notified promptly, end shall have the
right for a period of thirty (30) days following receipt of such notice in which
to elect to participate in ;he ownership of the renewal lease, insofar as such
lease affects lands within the Contract Area, by paying to the party who
acquired it their several proper proportionate shares of the acquisition cost
allocated to that part of such lease within the Contract Area, which shall be in
proportion to the interests held at that time by the parties in the Contract
Area.

     If some, but less than all, of the parties elect to participate in the
purchase of a renewal lease, it shall be owned by the parties who elect to
participate therein, in a ratio based upon the relationship of their respective
percentage of participation in the Contract Area to the aggregate of the
percentages of participation in the Contract Area of all parties participating
in the purchase of such renewal lease. Any renewal lease in which less than all
parties elect to participate shall not be subject to this agreement.

     Each party who participates in the purchase of a renewal lease shall be
given an assignment of its proportionate interest therein by the acquiring
party.

     The provisions of this Article shall apply to renewal leases whether they
are for the entire interest covered by the expiring lease or cover only a
portion of its area or an interest therein. Any renewal lease taken before the
expiration of its predecessor lease, or taken or contracted for within six (6)
months after the expiration of the existing lease shall be subject to this
provision; but any lease taken or contracted for more than six (6) months after
the expiration of an existing lease shall not be deemed a renewal lease and
shall not be subject to the provisions of this agreement.

     The provisions in this Article shall also be applicable to extensions of
oil and gas leases.

C. Acreage or Cash Contributions:

     While this agreement is in force, if any party contracts for a contribution
of cash towards the drilling of a well or any other operation on the Contract
Area, such contribution shall be paid to the party who conducted the drilling or
other operation and shall be applied by it against the cost of such drilling or
other operation. If the contribution be in the form of acreage, the party to
whom the contribution is made shall promptly tender an assignment of the
acreage, without warranty of title, to the Drilling Parties in the proportions

                                      -11-

<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982

                                  ARTICLE VIII
                                   continued

said Drilling Parties shared the cost of drilling the well. Such acreage shall
become a separate Contract Area and, to the extent possible, be governed by
provisions identical to this agreement. Each party shall promptly notify all
other parties of any acreage or cash contributions it may obtain in support of
any well or any other operation on the Contract Area. The above provisions shall
also be applicable to optional rights to earn acreage outside the Contract Area
which are in support of a well drilled inside the Contract Area.

     If any party contracts for any consideration relating to disposition of
such party's share of substances produced hereunder, such consideration shall
not be deemed a contribution as contemplated in this Article VIII.C.

D. Maintenance of Uniform Interest:

     For the purpose of maintaining uniformity of ownership in the oil and gas
leasehold interests covered by this agreement, no party shall sell, encumber,
transfer or make other disposition of its interest in the leases embraced within
the Contract Area and in wells, equipment and production unless such disposition
covers either:

     1. the entire interest of the party in all leases and equipment and
production; or

     2.. an equal undivided interest in all leases and equipment and production
in the Contract Area.

     Every such sale, encumbrance, transfer or other disposition made by any
party shall be made expressly subject to this agreement and shall be made
without prejudice to the right of the other parties.

     If, at any time the interest of any party is divided among and owned by
four or more co-owners, Operator, at its discretion, may require such co-owners
to appoint a single trustee or agent with full authority to receive notices,
approve expenditures, receive billings for and approve and pay such party's
share of the joint expenses, and to deal generally with, and with power to bind,
the co-owners of such party's interest within the scope of the operations
embraced in this agreement; however, all such co-owners shall have the right to
enter into and execute all contracts or agreements for the disposition of their
respective shares of the oil and gas produced from the Contract Area and they
shall have the right to receive, separately, payment of the sale proceeds
thereof.

E. Waiver of Rights to Partition:

     If permitted by the laws of the state or states in which the property
covered hereby is located, each party hereto owning an undivided interest in the
Contract Area waives any and all rights it may have to partition and have set
aside to it in severalty its undivided interest therein.

F. Preferential Right to Purchase:

     Should any party desire to sell all or any part of its interests under this
agreement, or its rights and interests in the Contract Area, it shall promptly
give written notice to the other parties, with full information concerning its
proposed sale, which shall include the name and address of the prospective
purchaser (who trust be ready, willing and able to purchase), the purchase
price, and all other terms of the offer. The other parties shall then have an
optional prior right, for a period of ten (10) days after receipt of the notice,
to purchase on the same terms and conditions the interest which the other party
proposes to sell; and, if this optional right is exercised, the purchasing
parties shall share the purchased interest in the proportions that the interest
of each bears to the total interest of all purchasing parties. However, there
shall be no preferential right to purchase in those cases where any party wishes
to mortgage its interests, or to dispose of its interests by merger,
reorganization, consolidation, or sale of all or substantially all of its assets
to a subsidiary or parent company or to a subsidiary of a parent company, or to
any company in which any one party owns a majority of the stock.

                                   ARTICLE IX.
                         INTERNAL REVENUE CODE ELECTION

     This agreement is not intended to create, and shall not be construed to
create, a relationship of partnership or an association for profit between or
among the parties hereto. Notwithstanding any provision herein that the rights
and liabilities hereunder are several and nut joint or collective, or that this
agreement and operations hereunder shall not constitute a partnership, if, for
federal income tax purposes, this agreement and the operations hereunder are
regarded as a partnership, each party hereby affected elects to be excluded from
the application of all of the provisions of Subchapter "K", Chapter 1, Subtitle
"A", of the Internal Revenue Code of 195/t, as permitted and authorized by
Section 761 of the Code and the regulations promulgated thereunder. Operator is
authorized and directed to execute on behalf of each party hereby affected such
evidence of this election as may be required by the Secretary of the Treasury of
the United States or the Federal Internal Revenue Service, including
specifically, but not by way of limitation, all of the returns, statements, and
the data required by Federal Regulations 1.761. Should there be any requirement
that each party hereby affected give further evidence of this election, each
such party shall execute such documents and furnish such other evidence as may
be required by the Federal Internal Revenue Service or as may be necessary to
evidence this election. No such party shall give any notices or take any other
action inconsistent with the election made hereby. If any present or future
income tax laws of the state or states in which the Contract Area is located or
any future income tax laws of the United States contain provisions similar to
those in Subchapter "K", Chapter 1, Subtitle "A", of the Internal Revenue Code
of 1954, under which an election similar to that provided by Section 761 of the
Code is permitted, each party hereby affected shall make such election as may be
permitted or required by such laws. In making the foregoing election, each such
party states that the income derived by such party from operations hereunder can
be adequately determined without the computation of partnership taxable income.

                                      -12-
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982

                                   ARTICLE X.
                               CLAIMS AND LAWSUITS

     Operator may settle any single uninsured third party damage claim or suit
arising from operations hereunder if the expenditure does not exceed Ten
Thousand & 00/100 Dollars ($10,000.00) and if the payment is in complete
settlement of such claim or suit. If the amount required for settlement exceeds
the above amount, the parties hereto shall assume and take over the further
handling of the claim or suit, unless such authority is delegated to Operator.
All costs and expenses of handling, settling, or otherwise discharging such
claim or suit shall be at the joint expense of the parties participating in the
operation from which the claim or suit arises. If a claim is made against any
party or if any party is sued on account of any matter arising from operations
hereunder over which such individual has no control because of the rights given
Operator by this agreement, such party shall immediately notify all other
parties, and the claim or suit shall be treated as any other claim or suit
involving operations hereunder.

                                   ARTICLE XI.
                                  FORCE MAJEURE

     If any party is rendered unable, wholly or in part, by force majeure to
carry out its obligations under this agreement, other titan the obligation to
make money payments, that party shall give to all other parties prompt written
notice of the force majeure with reasonably full particulars concerning it;
thereupon, the obligations of the party giving the notice, so far as they are
affected by the force majeure, shall be suspended during, but no longer than,
the continuance of the force majeure. The affected party shall use all
reasonable diligence to remove the force majeure situation as quickly as
practicable.

     The requirement that any force majeure shall be remedied with all
reasonable dispatch shall not require the settlement of strikes, lockouts, or
other labor difficulty by the party involved, contrary to its wishes; how all
such difficulties shall be handled shall be entirely within the discretion of
the party concerned.

     The term "force majeure", as here employed, shall mean an act of God,
strike, lockout, or other industrial disturbance, act of the public enemy, war,
blockade, public riot, lightning, fire, storm, flood, explosion, governmental
action, governmental delay, restraint or inaction, unavailability of equipment,
and any other cause, whether of the kind specifically enumerated above or
otherwise, which is not reasonably within the control of the party claiming
suspension.

                                  ARTICLE XII.
                                     NOTICES

     All notices authorized or required between the parties and required by any
of the provisions of this agreement, unless otherwise specifically provided,
shall be given in writing by mail or telegram, postage or charges prepaid, or by
telex or telecopier and addressed to the parties to whom the notice is given at
the addresses listed on Exhibit "A". The originating notice given under any
provision hereof shall be deemed given only when received by the party to whom
such notice is directed, and the time for such party to give any notice in
response thereto shall run from the date the originating notice is received. The
second or any responsive notice shall be deemed given when deposited in the mail
or with the telegraph company, with postage or charges prepaid, or sent by telex
or telecopier. Each party shall have the right to change its address at any
time, and from time to time, by giving written notice thereof to all other
parties.

                                  ARTICLE XIII.
                                TERM OF AGREEMENT

     This agreement shall remain in full force and effect as to the oil and gas
leases and/or oil and gas interests subject hereto for the period of time
selected below; provided, however, no party hereto shall ever be construed as
having any right, title or interest in or to any lease or oil and gas interest
contributed by any other party beyond the term of this agreement.

     Option No. 1: So long as any of the oil and gas leases subject to this
agreement remain or are continued in force as to any part of the Contract Area,
whether by production, extension, renewal or otherwise.

     It is agreed, however, that the termination of this agreement shall not
relieve any party hereto from any liability which has accrued or attached prior
to the date of such termination.

                                      -13-
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982

                                  ARTICLE XIV.
                      COMPLIANCE WITH LAWS AND REGULATIONS

A. Laws, Regulations and Orders:

     This agreement shall be subject to the conservation laws of the state in
which the Contract Area is located, to the valid rules, regulations, and orders
of any duly constituted regulatory body of said state; and to all other
applicable federal, state, and local laws, ordinances, rules, regulations, and
orders.

B. Governing Law:

     This agreement and all matters pertaining hereto, including, but not
limited to, matters of performance, non-performance, breach, remedies,
procedures, rights, duties and interpretation or construction, shall be governed
and determined by the law of the state in which the Contract Area is located. If
the Contract Area is in two or more states, the law of the state of Texas shall
govern.

C. Regulatory Agencies:

     Nothing herein contained shall grant, or be construed to grant, Operator
the right or authority to waive or release any rights, privileges, or
obligations which Non-Operators may have under federal or state laws or under
rules, regulations or orders promulgated under such laws in reference to oil,
gas and mineral operations, including the location, operation, or production of
wells, on tracts offsetting or adjacent to the Contract Area.

     With respect to operations hereunder, Non-Operators agree to release
Operator from any and all losses. damages, injuries, claims and causes of action
arising out of, incident to or resulting directly or indirectly from Operator's
interpretation. or application of rules. rulings, regulations or orders of the
Department of Energy or predecessor or successor agencies to the extent such
interpretation or application was made in good faith. Each Non-Operator further
agrees to reimburse Operator for any amounts applicable to such NonOperator's
share of production that Operator may be required to refund, rebate or pay as a
result of such an incorrect interpretation or application, together with
interest and penalties thereon owing by Operator as a result of such incorrect
interpretation or application.

     Non-Operators authorize Operator to prepare and submit such documents as
may be required to be submitted to the purchaser of any crude oil sold hereunder
or to any other person or entity pursuant to the requirements of the "Crude Oil
Windfall Profit Tax Act of 1980", as same may be amended from time to time
("Act"), and any valid regulations or rules which may be issued by the Treasury
Department from time to time pursuant to said Act. Each party hereto agrees to
furnish any and all certifications or other information which is required to be
furnished by said Act in a timely manner and in sufficient detail to permit
compliance with said Act.

                                   ARTICLE XV.
                                OTHER PROVISIONS

                                      -14-

<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982

                                  ARTICLE XVI.

                                  MISCELLANEOUS

     This agreement shall be binding upon and shall inure to the benefit of the
parties hereto and to their respective heirs, devisees, legal representatives,
successors and assigns.

         This instrument may be executed in any number of counterparts, each of
     which shall be considered an original for all purposes.

         IN WITNESS WHEREOF, this agreement shall be effective as of 1st day of
December, 2000.

                                    OPERATOR

/s/ W. Dale Miller
----------------------------
D-Mil Productions, Inc.
By:  W. Dale Miller - Pres.


                                  NON-OPERATORS

/s/ Arthur P. Dammarell, Jr.
----------------------------
By: Arthur P. Dammarell, Jr. Treasurer/Director
    NOVA OIL, INC.


























                                      -15-
<PAGE>
                                  EXHIBIT "A"
PARTICPATION AGREEMENT

PRODUCTION, INC.
102 DALLAS STREET
P.O. BOX 49
ARGYLE, TX 76226

PARTICIPATION AGREEMENT

Re: D-Mil Production, Inc.- Smith-Boswell #1 and Steinbach Unit #1

Gentlemen:

This letter sets out our agreement  relative to the above referenced oil and gas
property more specifically described as:

         SMITH-BOSWELL  #1 -  43.7342  Acre  Unit  in the  Ruth  Mackey  Survey,
Abstract 47, Bastrop County, Texas, RRC #19600.

         STEINBACH UNIT #1 - 40.32 Acre Unit in the Ruth Mackey Survey, Abstract
47, Bastrop County, Texas, RRC #19848.

1.  D-Mil  Production,  Inc.  agrees  to sell and you agree to  purchase  49.50%
working  interest in the above  described  property.  The net  revenue  interest
relative to the working interest is 38.61%.

2. D-Mil  Production,  Inc. shall  execute,  record and deliver an assignment of
your  interest  in the well and  property.  Said  assignment  shall  convey your
interest as a working interest.

3. All  operations of said lease shall be conducted  under an AAPL Form 610-1982
Operating Agreement, a copy of which will be provided.

4. Nothing in this letter or in said operating  agreement  creates any mining or
other partnership or joint venture.- The liability of the parties is several and
not joint or collective.

5. The  undersigned  represents  that they have such knowledge and experience in
financial and business  matters so as to be capable of evaluating the merits and
risks of this investment and that they have the financial  resources  sufficient
to bear the same.

6. These oil and gas  interests  are  offered in  reliance  upon the  exemptions
provided for under Section 4 [2] of the Securities Act of 1933, As Amended,  and
Regulations D promulgated thereunder the similar exemptions by State Law.

7. The undersigned  hereby  constitutes and appoints D-Mil  Production,  Inc. as
their true and lawful  attorney-in-fact for them and their name, place and stead
and for its use and benefit to execute,  acknowledge,  swear,  certify,  verify,
deliver,  record,  file and publish as necessary  or advisable  all gas purchase
contracts, farmout agreements,  unitization agreements and all other instruments
such  attorney-in-fact  shall  consider  necessary,  advisable or  convenient in
connection  with or for the purposes of  conducting  operations  on the land and
leases covered hereby.

If the above sets out your understanding of our agreement, please execute in the
space provided  below and return this  Participation  Agreement,  and your check
payable to D-Mil Production,  Inc. in the amount of $29,700.00 for your interest
share of the Program described herein.

Very truly yours,


/s/W. DALE MILLER
--------------------------
W. Dale Miller - President
D-Mil Production, Inc.
102 Dallas Street, P.O. Box 49
Argyle, TX 76226
<PAGE>

ACCEPTED AND AGREED TO this the 7th day of December, 200.

/s/
Arthur P. Dammarell Jr., Treasurer/Director


Please type or print the following  information  as you wish it to appear on all
documents and correspondence mailed to you.

OWNER NAME   NOVA OIL, INC.

ADDRESS  9518 N. Chance Lane

CITY              Spokane

STATE    Washington         ZIP  99218-2200

TELEPHONE (509) 466-0576

SOCIAL SECURITY
OR TAX I . D . #           91-2028450




<PAGE>

                                   EXHIBIT "C"

Attached  to and made a part of that  certain  AAPL  Form  610-1982  Model  Form
Operating  Agreement dated December 1st, 2000, entered into by D-MIL Production,
Inc. as Operator and other signatory parties as non-operators.

                              ACCOUNTING PROCEDURE
                                JOINT OPERATIONS

                              I. GENERAL PROVISIONS

1.    Definitions

      "Joint Property" shall mean the real and personal  property subject to the
      agreement  to  which  this  Accounting   Procedure  is  attached.   "Joint
      Operations"  shall  mean  all  operations  necessary  or  proper  for  the
      development, operation, protection and maintenance of the Joint Property.
      "Joint  Account"  shall mean the  account  showing  the  charges  paid and
      credits  received in the conduct of the Joint  Operations and which are to
      be shared by the Parties.  "Operator"  shall mean the party  designated to
      conduct the Joint  Operations.  "Non-Operators"  shall mean the Parties to
      this agreement other than the Operator.  "Parties" shall mean Operator and
      Non-Operators.
      "First  Level  Supervisors"  shall  mean  those  employees  whose  primary
      function in Joint Operations is the direct  supervision of other employees
      and/or  contract labor directly  employed on the Joint Property in a field
      operating capacity.
      "Technical  Employees"  shall  mean those  employees  having  special  and
      specific  engineering,  geological or other professional skills, and whose
      primary function in Joint Operations is the handling of specific operating
      conditions and problems for the benefit of the Joint Property.
      "Personal  Expenses" shall mean travel and other  reasonable  reimbursable
      expenses of Operator's employees. "Material" shall mean personal property,
      equipment or supplies acquired or held for use on the Joint Property.
      "Controllable  Material"  shall  mean  Material  which  at the  time is so
      classified  in  the  Material   Classification  Manual  as  most  recently
      recommended by the Council of Petroleum Accountants Societies.

2.    Statement and Billings

      Operator shall bill  Non-Operators on or before the last day of each month
      for their  proportionate  share of the  Joint  Account  for the  preceding
      month.  Such bills will be  accompanied  by statements  which identify the
      authority for expenditure,  lease or facility, and all charges and credits
      summarized by appropriate classifications of investment and expense except
      that items of Controllable  Material and unusual charges and credits shall
      be separately identified and fully described in detail.

3.    Advances and Payments by Non-Operators

      A.   Unless otherwise provided for in the agreement, the Operator may
           require the Non-Operators to advance their share of estimated cash
           outlay for the succeeding month's operation within fifteen (15) days
           after receipt of the billing or by the first day of the month for
           which the advance is required, whichever is later. Operator shall
           adjust each monthly billing to reflect advances received from the
           Non-Operators.

      B.   Each Non-Operator shall pay its proportion of all bills within
           fifteen (15) days after receipt. If payment is not made within such
           time, the unpaid balance shall bear interest monthly at the rate of
           twelve percent (12%) on the first day of the month in which
           delinquency occurs plus 1% or the maximum contract rate permitted by
           the applicable usury laws in the state in which the Joint Property is
           located, whichever is the lesser, plus attorney's fees, court costs,
           and other costs in connection with the collection of unpaid amounts.

4.    Adjustments

      Payment of any such bills shall not prejudice the right of any
      Non-Operator to protest or question the correctness thereof; provided,
      however, all bills and statements rendered to Non-Operators by Operator
      during any calendar year shall conclusively be presumed to be true and
      correct after twenty-four (24) months following the end of any such
      calendar year, unless within the said twenty-four (24) month period a
      Non-Operator takes written exception thereto and makes claim on Operator
      for adjustment. No adjustment favorable to Operator shall be made unless
      it is made within the same prescribed period. The provisions of this
      paragraph shall not prevent adjustments resulting from a physical
      inventory of Controllable Material as provided for in Section V.

                                       -1-
<PAGE>
5.    Audits

      A.   A Non-Operator, upon notice in writing to Operator and all other
           Non-Operators, shall have the right to audit Operator's accounts and
           records relating to the Joint Account for any calendar year within
           the twenty-four (24) month period following the end of such calendar
           year; provided, however, the making of an audit shall not extend the
           time for the taking of written exception to and the adjustments of
           accounts as provided for in Paragraph 4 of this Section I. Where
           there are two or more Non-Operators, the Non-Operators shall make
           every reasonable effort to conduct a joint audit in a manner which
           will result in a minimum of inconvenience to the Operator. Operator
           shall bear no portion of the Non-Operators' audit cost incurred under
           this paragraph unless agreed to by the Operator. The audits shall not
           be conducted more than once each year without prior approval of
           Operator, except upon the resignation or removal of the Operator, and
           shall be made at the expense of those Non-Operators approving such
           audit.

      B.   The Operator shall reply in writing to an audit report within 180
           days after receipt of such report.

6.    Approval By Non-Operators

      Where an approval or other  agreement of the Parties or  Non-Operators  is
      expressly  required under other sections of this Accounting  Procedure and
      if the agreement to which this Accounting  Procedure is attached  contains
      no  contrary  provisions  in regard  thereto,  Operator  shall  notify all
      Non-Operators of the Operator's proposal, and the agreement or approval of
      a majority in interest of the  Non-Operators  shall be  controlling on all
      Non-Operators.

                               II. DIRECT CHARGES

Operator shall charge the Joint Account with the following items:

1.    Ecological and Environmental

      Costs  incurred  for the  benefit  of the  Joint  Property  as a result of
      governmental   or  regulatory   requirements   to  satisfy   environmental
      considerations applicable to the Joint Operations.  Such costs may include
      surveys of an ecological or  archaeological  nature and pollution  control
      procedures as required by applicable laws and regulations.

2.    Rentals and Royalties

      Lease rentals and royalties paid by Operator for the Joint Operations.

3.    Labor

      A.   (1) Salaries and wages of Operator's field employees directly
           employed on the Joint Property in the conduct of Joint Operations.

           (2) Salaries of First Level Supervisors in the field.

           (3) Salaries and wages of Technical  Employees  directly  employed on
               the Joint Property if such charges are excluded from the overhead
               rates.

           (4) Salaries and wages of Technical  Employees either  temporarily or
               permanently assigned to and directly employed in the operation of
               the Joint Property if such charges are excluded from the overhead
               rates.

      B.   Operator's cost of holiday, vacation, sickness and disability
           benefits and other customary allowances paid to employees whose
           salaries and wages are chargeable to the Joint Account under
           Paragraph 3A of this Section II. Such costs under this Paragraph 3B
           may be charged on a "when and as paid basis" or by "percentage
           assessment" on the amount of salaries and wages chargeable to the
           Joint Account under Paragraph 3A of this Section II. If percentage
           assessment is used, the rate shall be based on the Operator's cost
           experience.

      C.   Expenditures or contributions made pursuant to assessments imposed by
           governmental authority which are applicable to Operator's costs
           chargeable to the Joint Account under Paragraphs 3A and 3B of this
           Section II.

      D.   Personal Expenses of those employees whose salaries and wages are
           chargeable to the Joint Account under Paragraph 3A of this Section
           II.

4.    Employee Benefits

      Operator's current costs of established plans for employees' group life
      insurance, hospitalization, pension, retirement, stock purchase, thrift,
      bonus, and other benefit plans of a like nature, applicable to Operator's
      labor cost chargeable to the Joint Account under Paragraphs 3A and 3B of
      this Section II shall be Operator's actual cost not to exceed the percent
      most recently recommended by the Council of Petroleum Accountants
      Societies.

5.    Material

      Material  purchased or furnished by Operator for use on the Joint Property
      as provided under Section IV. Only such Material shall be purchased for or
      transferred to the Joint Property as may be required for immediate use and
      is  reasonably  practical and  consistent  with  efficient and  economical
      operations. The accumulation of surplus stocks shall be avoided.

6. Transportation

      Transportation of employees and Material necessary for the Joint
      Operations but subject to the following limitations:

      A.   If Material is moved to the Joint Property from the Operator's
           warehouse or other properties, no charge shall be made to the Joint
           Account for a distance greater than the distance from the nearest
           reliable supply store where like material is normally available or
           railway receiving point nearest the Joint Property unless agreed to
           by the Parties.

                                       -2-

<PAGE>
      B.   If surplus Material is moved to Operator's warehouse or other storage
           point, no charge shall be made to the Joint Account for a distance
           greater than the distance to the nearest reliable supply store where
           like material is normally available, or railway receiving point
           nearest the Joint Property unless agreed to by the Parties. No charge
           shall be made to the Joint Account for moving Material to other
           properties belonging to Operator, unless agreed to by the Parties.

      C.   In the application of subparagraphs A and B above, the option to
           equalize or charge actual trucking cost is available when the actual
           charge is $400 or less excluding accessorial charges. The $400 will
           be adjusted to the amount most recently recommended by the Council of
           Petroleum Accountants Societies.

7.    Services

      The cost of contract services, equipment and utilities provided by outside
      sources, except services excluded by Paragraph 10 of Section II and
      Paragraph i, ii, and iii, of Section III. The cost of professional
      consultant services and contract services of technical personnel directly
      engaged on the Joint Property if such charges are excluded from the
      overhead rates. The cost of professional consultant services or contract
      services of technical personnel not directly engaged on the Joint Property
      shall not be charged to the Joint Account unless previously agreed to by
      the Parties.

8.    Equipment and Facilities Furnished By Operator

      A.   Operator shall charge the Joint Account for use of Operator owned
           equipment and facilities at rates commensurate with costs of
           ownership and operation. Such rates shall include costs of
           maintenance, repairs, other operating expense, insurance, taxes,
           depreciation, and interest on gross investment less accumulated
           depreciation not to exceed Twelve percent (12%) per annum. Such rates
           shall not exceed average commercial rates currently prevailing in the
           immediate area of the Joint Property.

      B.   In lieu of charges in paragraph 8A above, Operator may elect to use
           average commercial rates prevailing in the immediate area of the
           Joint Property less 20%. For automotive equipment, Operator may elect
           to use rates published by the Petroleum Motor Transport Association.

9.    Damages and Losses to Joint Property

      All costs or expenses necessary for the repair or replacement of Joint
      Property made necessary because of damages or losses incurred by fire,
      flood, storm, theft, accident, or other cause, except those resulting from
      Operator's gross negligence or willful misconduct. Operator shall furnish
      Non-Operator written notice of damages or losses incurred as soon as
      practicable after a report thereof has been received by Operator.

10.   Legal Expense

      Expense of handling, investigating and settling litigation or claims,
      discharging of liens, payment of judgements and amounts paid for
      settlement of claims incurred in or resulting from operations under the
      agreement or necessary to protect or recover the Joint Property, except
      that no charge for services of Operator's legal staff or fees or expense
      of outside attorneys shall be made unless previously agreed to by the
      Parties. All other legal expense is considered to be covered by the
      overhead provisions of Section III unless otherwise agreed to by the
      Parties, except as provided in Section I, Paragraph 3.

11.   Taxes

      All taxes of every kind and nature assessed or levied upon or in
      connection with the Joint Property, the operation thereof, or the
      production therefrom, and which taxes have been paid by the Operator for
      the benefit of the Parties. If the ad valorem taxes are based in whole or
      in part upon separate valuations of each party's working interest, then
      notwithstanding anything to the contrary herein, charges to the Joint
      Account shall be made and paid by the Parties hereto in accordance with
      the tax value generated by each party's working interest.

12.   Insurance

      Net premiums paid for insurance required to be carried for the Joint
      Operations for the protection of the Parties. In the event Joint
      Operations are conducted in a state in which Operator may act as
      self-insurer for Worker's Compensation and/ or Employers Liability under
      the respective state's laws, Operator may, at its election, include the
      risk under its selfinsurance program and in that event, Operator shall
      include a charge at Operator's cost not to exceed manual rates.

13.   Abandonment and Reclamation

      Costs incurred for abandonment of the Joint Property, including costs
      required by governmental or other regulatory authority.

14.   Communications

      Cost of acquiring, leasing, installing, operating, repairing and
      maintaining communication systems, including radio and microwave
      facilities directly serving the Joint Property. In the event communication
      facilities/systems serving the Joint Property are Operator owned, charges
      to the Joint Account shall be made as provided in Paragraph 8 of this
      Section II.

14.   Other Expenditures

      Any other expenditure not covered or dealt with in the foregoing
      provisions of this Section II, or in Section III and which is of direct
      benefit of the Joint Property and is incurred by the Operator in the
      necessary and proper conduct of the Joint Operations.

                                       -3-
<PAGE>
                                  III. OVERHEAD

1.    Overhead - Drilling and Producing Operations

      i.   As compensation for administrative,  supervision, office services and
           warehousing  costs,  Operator  shall charge  drilling  and  producing
           operations on either:

           ( ) Fixed Rate Basis, Paragraph 1A, or
           ( ) Percentage Basis, Paragraph 1B

           Unless otherwise agreed to by the Parties, such charge shall be in
           lieu of costs and expenses of all offices and salaries or wages plus
           applicable burdens and expenses of all personnel, except those
           directly chargeable under Paragraph 3A, Section II. The cost and
           expense of services from outside sources in connection with matters
           of taxation, traffic, accounting or matters before or involving
           governmental agencies shall be considered as included in the overhead
           rates provided for in the above selected Paragraph of this Section
           III unless such cost and expense are agreed to by the Parties as a
           direct charge to the Joint Account.

      ii.  The  salaries,  wages and Personal  Expenses of  Technical  Employees
           and/or the cost of  professional  consultant  services  and  contract
           services  of  technical  personnel  directly  employed  on the  Joint
           Property:

           ( ) shall be covered by the overhead rates, or ( ) shall not be
           covered by the overhead rates.

      iii. The  salaries,  wages and Personal  Expenses of  Technical  Employees
           and/or  costs  of  professional   consultant  services  and  contract
           services of technical  personnel  either  temporarily  or permanently
           assigned  to and  directly  employed  in the  operation  of the Joint
           Property:

           ( ) shall be covered by the overhead rates, or ( ) shall not be
           covered by the overhead rates.

      A.   Overhead - Fixed Rate Basis

           (1) Operator shall charge the Joint Account at the following rates
           per well per month:

               Drilling Well Rate $ N/A
                 (Prorated for less than a full month)

               Producing Well Rate $ 200.00

           (2) Application of Overhead - Fixed Rate Basis shall be as follows:

               (a) Drilling Well Rate

                   (1)  Charges for  drilling  wells shall begin on the date the
                        well is spudded and  terminate  on the date the drilling
                        rig,  completion  rig, or other units used in completion
                        of the well is released, whichever is later, except that
                        no charge shall be made during suspension of drilling or
                        completion   operations   for   fifteen   (15)  or  more
                        consecutive calendar days.

                   (2)  Charges  for wells  undergoing  any type of  workover or
                        recompletion  for a period of five (5) consecutive  work
                        days or more  shall be made at the  drilling  well rate.
                        Such  charges  shall be applied for the period from date
                        workover  operations,  with rig or other  units  used in
                        workover,  commence  through  date of rig or other  unit
                        release,  except  that no  charge  shall be made  during
                        suspension  of  operations  for  fifteen  (15)  or  more
                        consecutive calendar days.

               (b) Producing Well Rates

                    (1) An active well either  produced or injected into for any
                        portion of the month  shall be  considered  as a onewell
                        charge for the entire month.

                    (2) Each  active  completion  in a  mufti-completed  well in
                        which  production is not  commingled  down hole shall be
                        considered   as  a  one-well   charge   providing   each
                        completion   is   considered  a  separate  well  by  the
                        governing regulatory authority.

                    (3) An inactive  gas well shut in because of  overproduction
                        or failure of purchaser to take the production  shall be
                        considered as a one-well  charge  providing the gas well
                        is directly connected to a permanent sales outlet.

                    (4) A one-well  charge  shall be made for the month in which
                        plugging and abandonment operations are completed on any
                        well.  This one-well charge shall be made whether or not
                        the well has  produced  except when  drilling  well rate
                        applies.

                    (5) All other inactive  wells  (including but not limited to
                        inactive   wells  covered  by  unit   allowable,   lease
                        allowable,   transferred  allowable,   etc.)  shall  not
                        qualify for an overhead charge.

     (3) The well rates shall be adjusted as of the first day of April each year
         following the effective date of the agreement to which This  Accounting
         Procedure is attached.  The adjustment shall be computed by multiplying
         the rate currently in use by the percentage increase or decrease in the
         average weekly earnings of Crude  Petroleum and Gas Production  Workers
         for the last calendar  year compared to the calendar year  preceding as
         shown by the index of average  weekly  earnings of Crude  Petroleum and
         Gas Production  Workers as published by the United States Department of
         Labor, Bureau of Labor Statistics,  or the equivalent Canadian index as
         published by Statistics Canada, as applicable. The adjusted rates shall
         be the rates currently in use, plus or minus the computed adjustment.

     B.  Overhead - Percentage Basis

         (1) Operator shall charge the Joint Account at the following rates:

                                       -4-
<PAGE>
               (a) Development

                   ____Percent(  %) of the  cost  of  development  of the  Joint
                   Property  exclusive of costs provided  under  Paragraph 10 of
                   Section II and all salvage credits.

               (b) Operating

                   _____Percent( %) of the cost of operating the Joint  Property
                   exclusive  of costs  provided  under  Paragraphs  2 and 10 of
                   Section  II,  all  salvage  credits,  the  value of  injected
                   substances purchased for secondary recovery and all taxes and
                   assessments  which  are  levied,  assessed  and paid upon the
                   mineral interest in and to the Joint Property.

           (2) Application of Overhead - Percentage Basis shall be as follows:

               For the  purpose of  determining  charges on a  percentage  basis
               under Paragraph 1B of this Section III, development shall include
               all costs in connection with drilling, redrilling,  deepening, or
               any remedial  operations on any or all wells involving the use of
               drilling  rig and  crew  capable  of  drilling  to the  producing
               interval on the Joint Property;  also,  preliminary  expenditures
               necessary in preparation for drilling and  expenditures  incurred
               in abandoning  when the well is not completed as a producer,  and
               original cost of  construction  or  installation of fixed assets,
               the  expansion  of fixed  assets  and any other  project  clearly
               discernible  as a  fixed  asset,  except  Major  Construction  as
               defined in Paragraph 2 of this Section III. All other costs shall
               be considered as operating.

2.    Overhead - Major Construction

      To compensate Operator for overhead costs incurred in the construction and
      installation of fixed assets, the expansion of fixed assets, and any other
      project clearly  discernible as a fixed asset required for the development
      and operation of the Joint  Property,  Operator  shall either  negotiate a
      rate prior to the  beginning  of  construction,  or shall charge the Joint
      Account  for  overhead  based  on  the  following   rates  for  any  Major
      Construction project in excess of $10,000.00.

      A.     10% of first $100,000 or total cost if less, plus

      B.       6% of costs in excess of $100,000 but less than $1,000,000, plus

      C.       3% of costs in excess of $1,000,000.

      Total cost shall mean the gross cost of any one  project.  For the purpose
      of this  paragraph,  the component  parts of a single project shall not be
      treated  separately  and the  cost of  drilling  and  workover  wells  and
      artificial lift equipment shall be excluded.

3.    Catastrophe Overhead

      To  compensate  Operator  for  overhead  costs  incurred  in the  event of
      expenditures resulting from a single occurrence due to oil spill, blowout,
      explosion,  fire, storm,  hurricane, or other catastrophes as agreed to by
      the  Parties,  which are  necessary  to restore the Joint  Property to the
      equivalent   condition  that  existed  prior  to  the  event  causing  the
      expenditures, Operator shall either negotiate a rate prior to charging the
      Joint Account or shall charge the Joint Account for overhead  based on the
      following rates:

       A.     10% of total costs through $100,000; plus

       B.      6% of total costs in excess of $100,000 but less than $1,000,000;
                  plus

       C.       3% of total costs in excess of $1,000,000.

       Expenditures  subject  to the  overheads  above  will not be  reduced  by
       insurance  recoveries,  and no other overhead  provisions of this Section
       III shall apply.

4.     Amendment of Rates

       The overhead  rates  provided for in this Section III may be amended from
       time to time only by mutual  agreement  between the Parties hereto if, in
       practice, the rates are found to be insufficient or excessive.

   IV. PRICING OF JOINT ACCOUNT MATERIAL PURCHASES, TRANSFERS AND DISPOSITIONS

Operator is  responsible  for Joint  Account  Material and shall make proper and
timely  charges and  credits  for all  Material  movements  affecting  the Joint
Property.  Operator  shall  provide all Material for use on the Joint  Property;
however,   at  Operator's   option,   such  Material  may  be  supplied  by  the
Non-Operator.  Operator  shall make timely  disposition  of idle and/or  surplus
Material,   such  disposal  being  made  either  through  sale  to  Operator  or
Non-Operator, division in kind, or sale to outsiders. Operator may purchase, but
shall be under no obligation to purchase,  interest of  Non-Operators in surplus
condition A or B Material  The  disposal of surplus  Controllable  Material  not
purchased by the Operator shall be agreed to by the Parties.

1.  Purchases

Material  purchased  shall  be  charged  at the  price  paid by  Operator  after
deduction of all discounts  received.  In case of Material found to be defective
or returned to vendor for any other reasons, credit shall be passed to the Joint
Account when adjustment has been received by the Operator.

2.  Transfers and Dispositions

Material furnished to the Joint Property and Material transferred from the Joint
Property or  disposed  of by the  Operator,  unless  otherwise  agreed to by the
Parties, shall be priced on the following basis exclusive of cash discounts:

                                       -5-
<PAGE>
A. New Material (Condition A)

     (1) Tubular Goods Other than Line Pipe

         (a)  Tubular goods, sized 23/a inches OD and larger,  except line pipe,
              shall be priced at Eastern  mill  published  carload  base  prices
              effective as of date of movement  plus  transportation  cost using
              the 80,000 pound  carload  weight  basis to the railway  receiving
              point nearest the Joint  Property for which  published  rail rates
              for  tubular  goods  exist.  If the 80,000  pound rail rate is not
              offered,  the 70,000  pound or 90,000 pound rail rate may be used.
              Freight  charges for tubing will be calculated  from Lorain,  Ohio
              and casing from Youngstown, Ohio.

         (b)  For grades  which are  special to one mill only,  prices  shall be
              computed  at the mill base of that mill plus  transportation  cost
              from that mill to the railway  receiving  point  nearest the Joint
              Property  as  provided   above  in   Paragraph   2.A.(1)(a).   For
              transportation  cost from points  other than  Eastern  mills,  the
              30,000 pound Oil Field Haulers  Association  interstate truck rate
              shall be used.

         (c)  Special  end finish  tubular  goods  shall be priced at the lowest
              published   out-of-stock  price,  f.o.b.   Houston,   Texas,  plus
              transportation   cost,   using  Oil  Field   Haulers   Association
              interstate 30,000 pound truck rate, to the railway receiving point
              nearest the Joint Property.

         (d)  Macaroni tubing  (size less than 2 3/8 inch OD) shall be priced at
              the lowest published  out-of-stock prices f.o.b. the supplier plus
              transportation  costs,  using  the Oil Field  Haulers  Association
              interstate  truck  rate per weight of tubing  transferred,  to the
              railway receiving point nearest the Joint Property.

     (2) Line Pipe

         (a)  Line pipe movements  (except size 24 inch OD and larger with walls
              3/4 inch and  over) 30,000  pounds or more  shall be priced  under
              provisions  of tubular  goods  pricing in  Paragraph  A.(1)(a)  as
              provided  above.  Freight charges shall be calculated from Lorain,
              Ohio.

         (b)  Line pipe movements  (except size 24 inch OD and larger with walls
              3/4 inch and over)  less  than  30,000  pounds  shall be priced at
              Eastern mill published carload base prices effective as of date of
              shipment,  plus 20  percent,  plus  transportation  costs based on
              freight  rates as set forth  under  provisions  of  tubular  goods
              pricing in Paragraph  A.(1)(a) as provided above.  Freight charges
              shall be calculated from Lorain, Ohio.

         (c)  Line pipe 24 inch OD and over and 3/4 inch wall and  larger  shall
              be priced f.o.b. the point of manufacture at current new published
              prices plus  transportation  cost to the railway  receiving  point
              nearest the Joint Property.

         (d)  Line pipe,  including fabricated line pipe, drive pipe and conduit
              not  listed on  published  price  lists  shall be priced at quoted
              prices plus  freight to the railway  receiving  point  nearest the
              Joint Property or at prices agreed to by the Parties.

     (3) Other Material  shall be priced at the current new price,  in effect at
     date of movement,  as listed by a reliable  supply store  nearest the Joint
     Property,   or  point  of  manufacture,   plus  transportation   costs,  if
     applicable, to the railway receiving point nearest the Joint Property.

     (4)  Unused  new  Material,  except  tubular  goods,  moved  from the Joint
     Property  shall be priced at the  current  new price,  in effect on date of
     movement,  as listed by a reliable supply store nearest the Joint Property,
     or point of manufacture,  plus transportation costs, if applicable,  to the
     railway  receiving  point nearest the Joint  Property.  Unused new tubulars
     will be priced as provided above in Paragraph 2 A (1) and (2).

B. Good Used Material (Condition B)

     Material in sound and serviceable  condition and suitable for reuse without
reconditioning:

     (1) Material moved to the Joint Property

         At  seventy-five  percent (75%) of current new price,  as determined by
Paragraph A.

     (2)   Material used on and moved from the Joint Property

         (a)  At seventy-five  percent (75%) of current new price, as determined
              by Paragraph A, if Material  was  originally  charged to the Joint
              Account as new Material or

         (b)  At sixty-five percent (65%) of current new price, as determined by
              Paragraph  A, if  Material  was  originally  charged  to the Joint
              Account as used Material.

     (3) Material not used on and moved from the Joint Property

          At  seventy-five  percent  (75%) of current new price as determined by
Paragraph A.

The cost of  reconditioning,  if any,  shall  be  absorbed  by the  transferring
property.

C. Other Used Material

     (1) Condition C

     Material which is not in sound and  serviceable  condition and not suitable
     for its original  function until after  reconditioning  shall be charged to
     the  receiving   property,   provided   Condition  C  value  plus  cost  of
     reconditioning does not exceed Condition B value.

                                       -6-
<PAGE>
     (2) Condition D

               Material,  excluding  junk,  no longer  suitable for its original
               purpose,  but usable for some other  purpose shall be priced on a
               basis   commensurate  with  its  use.  Operator  may  dispose  of
               Condition D Material under  procedures  normally used by Operator
               without prior approval of Non-Operators.

               (a) Casing,  tubing,  or drill  pipe used as line  pipe  shall be
                   priced as Grade A and B seamless line pipe of comparable size
                   and weight.  Used  casing,  tubing or drill pipe  utilized as
                   line pipe shall be priced at used line pipe prices.

               (b) Casing,  tubing or drill pipe used as higher pressure service
                   lines than standard line pipe, e.g. power oil lines, shall be
                   priced under normal pricing procedures for casing, tubing, or
                   drill  pipe.  Upset  tubular  goods  shall be priced on a non
                   upset basis.

       (3) Condition E

               Junk shall be priced at prevailing prices. Operator may dispose
               of Condition E Material under procedures normally utilized by
               Operator without prior approval of Non-Operators.

      D. Obsolete Material

           Material  which is serviceable  and usable for its original  function
           but condition and/or value of such Material is not equivalent to that
           which would justify a price as provided above may be specially priced
           as agreed to by the Parties.  Such price  should  result in the Joint
           Account being charged with the value of the service  rendered by such
           Material.

      E. Pricing Conditions

          (1)  Loading or unloading costs may be charged to the Joint Account at
               the rate of  twenty-five  cents ($.25) per hundred  weight on all
               tubular goods  movements,  in lieu of actual loading or unloading
               costs  sustained at the stocking  point.  The above rate shall be
               adjusted as of the first day of April each year following January
               1,  1985 by the same  percentage  increase  or  decrease  used to
               adjust overhead rates in Section III, Paragraph LA(3). Each year,
               the rate  calculated  shall be  rounded to the  nearest  cent and
               shall be the rate in effect  until  the  first day of April  next
               year.  Such rate shall be  published  each year by the Council of
               Petroleum Accountants Societies.

           (2) Material  involving erection costs shall be charged at applicable
               percentage of the current knocked-down price of new Material.

3.    Premium Prices

      Whenever Material is not readily  obtainable at published or listed prices
      because of  national  emergencies,  strikes or other  unusual  causes over
      which the  Operator  has no  control,  the  Operator  may charge the Joint
      Account for the required  Material at the Operator's  actual cost incurred
      in providing such  Material,  in making it suitable for use, and in moving
      it to the Joint  Property;  provided  notice in  writing is  furnished  to
      Non-Operators  of the proposed charge prior to billing  Non-Operators  for
      such Material.  Each Non-Operator shall have the right, by so electing and
      notifying  Operator within ten days after receiving  notice from Operator,
      to furnish in kind all or part of his share of such Material  suitable for
      use and acceptable to Operator.

4.    Warranty of Material Furnished By Operator

      Operator  does not warrant the  Material  furnished.  In case of defective
      Material, credit shall not be passed to the Joint Account until adjustment
      has been received by Operator from the manufacturers or their agents.

                                 V. INVENTORIES

The Operator shall maintain detailed records of Controllable Material.

1.     Periodic Inventories, Notice and Representation

       At reasonable  intervals,  inventories  shall be taken by Operator of the
       Joint Account Controllable Material.  Written notice of intention to take
       inventory shall be given by Operator at least thirty (30) days before any
       inventory is to begin so that  Non-Operators  may be represented when any
       inventory is taken.  Failure of  Non-Operators  to be  represented  at an
       inventory  shall  bind  Non-Operators  to accept the  inventory  taken by
       Operator.

2.     Reconciliation and Adjustment of Inventories

       Adjustments to the Joint Account  resulting from the  reconciliation of a
       physical  inventory shall be made within six months  following the taking
       of the inventory.  Inventory adjustments shall be made by Operator to the
       Joint Account for overages and  shortages,  but,  Operator  shall be held
       accountable only for shortages due to lack of reasonable diligence.

3.  Special Inventories

       Special  inventories  may be taken whenever there is any sale,  change of
       interest,  or change of Operator in the Joint  Property.  It shall be the
       duty of the party  selling  to notify  all other  Parties  as  quickly as
       possible after the transfer of interest takes place. In such cases,  both
       the seller and the  purchaser  shall be  governed by such  inventory.  In
       cases  involving a change of Operator,  all Parties  shall be governed by
       such inventory.

4.  Expense of Conducting Inventories

     A.  The expense of conducting  periodic inventories shall not be charged to
     the Joint Account unless agreed to by the Parties.

     B. The expense of conducting  special  inventories  shall be charged to the
     Parties  requesting such inventories,  except  inventories  required due to
     change of Operator shall be charged to the Joint Account.

                                       -7-
<PAGE>
                                  EXHIBIT "D"
--------------------------------------------------------------------------------
ACORD CERTIFICATE OF LIABILITY INSURANCE                            12/19/2000
--------------------------------------------------------------------------------
PRODUCER(972) 783-6915 FAX (972)699-9950    THIS CERTIFICATE IS ISSUED AS A
                                            MATTER OF INFORMATION ONLY AND
Wood Wilson Company, Inc.                   CONFERS NO RIGHTS UPON THE
Jannette International                      CERTIFICATE HOLDER. THIS CERTIFICATE
8lll LBJ Freeway, Suits 585                 DOES NOT AMEND, EXTEND OR ALTER THE
Dallas , TX 75251                           COVERAGE AFFORDED BY THE POLICIES
                                            BELOW.
--------------------------------------------------------------------------------
                                                  INSURERS AFFORDING COVERAGE
--------------------------------------------------------------------------------
INSURED - D-Mil Production, Inc.                  INSURER A: Swett & Crawford
          Miller Oil Properties, Inc.
          P. 0. Box 49
          Argyle, TX 76126

--------------------------------------------------------------------------------
THE POLICIES OF INSURANCE LISTED BELOW HAVE SEEN ISSUED TO THE INSURED NAMED
ABOVE FOR THE POLICY PERIOD INOICATED. NOTWITHSTANDING ANY REQUIREMENT. TERM OR
CONDITION OF ANY CONTRACT OR OTHER DOCUMENT WITH RESPECT TO WHICH THIS
CERTIFICATE MAY BE ISSUED OR MAY PERTAIN, THE INSURANCE AFFORDED BY THE POLICIES
DESCRIBED HEREIN IS SUBJECT TO ALL THE TERMS, EXCLUSIONS AND CONDITIONS OF SUCH
POLICIES. AGGREGATE LIMITS SHOWN MAY HAVE BEEN REDUCED BY PAID CLAMS.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                  POLICY EFFECTIVE    POLICY EXPIRATOION
LTR        TYPE OF INSURANCE       POLICY NUMBER       DATE                  DATE                        LIMITS
----------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>            <C>                 <C>                 <C>                           <C>
      GENERAL LIABILITY            MUO5531074       07/31/7000             07/31/2001     EACH OCCURRENCE               $1,000,000
      X  COMMERCIAL GENERAL                                                               FIRE DAMAGE (Any one fire)    $  100,000
                   _ OCCUR                                                                MED EXP (Any one person)      $    5,000
A                                                                                         PERSONAL & ADV INJURY         $1,000,000
                                                                                          GENERAL AGGREGATE             $1,000,000
                                                                                          PRODUCTS - COMP/OP AGG        $1,000,000
--------------------------------------------------------------------------------
</TABLE>


CERTIFICATE HOLDER                      CANCELLATION

NOVA Oil. Inc.                          SHOULD ANY OF THE ABOVE DESCRIBED BE
                                        CANCELLED BEFORE THE EXPIRATION DATE
                                        THEREOF, THE ISSUING COMPANY WILL
                                        ENDEAVOR TO MAIL lO DAYS WRITTEN N0TICE
                                        TO THE CERTIFICATE HOLDER NAMED TO THE
                                        LEFT, BUT FAILURE TO MAIL SUCH NOTICE
                                        SHALL IMPOSE NO OBLIGATION OR LIABILITY
                                        OF ANY KIND UPON THE COMPANY, ITS AGENTS
                                        OR REPRESENTATIVES.

                                        AUTHORIZED REPRESENTATIVE

                                        R. Lamar Wilson